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Cablegate: South Africa Economic Newsletter October 15,

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PRETORIA 004621

SIPDIS

DEPT FOR AF/S/JDIFFILY; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR OAISA/BARBER/WALKER/JEWELL
USTR FOR COLEMAN
LONDON FOR GURNEY; PARIS FOR NEARY

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER OCTOBER 15,
2004 ISSUE


1. Summary. Each week, AMEmbassy Pretoria publishes an
economic newsletter based on South African press reports.
Comments and analysis do not necessarily reflect the
opinion of the U.S. Government. Topics of this week's
newsletter are:
- No change in Interest Rates;
- Tourism Earns More Foreign Exchange than Gold;
- Record South African Expansion Could Last Two Years;
- Housing Prices Continue to Increase;
- Manufacturing Capacity Utilization Increases;
- Carbon Trading to Begin;
- August Manufacturing Production Shows Growth;
- Building Confidence Survey at High Levels; and
- Improved Ranking in World Economic Forum's
Competitiveness Survey. End Summary.

NO CHANGE IN INTEREST RATES
---------------------------

2. The South African Reserve Bank's (SARB) Monetary
Policy Committee (MPC) kept interest rates unchanged after
its October 13-14 meeting, leaving the repurchase rate at
7.5 percent. SARB Governor Tito Mboweni stated that
targeted inflation (consumer prices excluding mortgages)
should remain well within its boundaries over the next two
years, increasing slightly in the near term, but
moderating later. He cited a number of factors
responsible for an optimistic inflationary outlook: (1) a
decline in inflationary expectations; (2) fiscal prudence
by government; (3) improved outlook for food prices; (4)
commitment to contain administered price increases; and
(5) lower average global inflation. Source: I-Net
Bridge, October 14.

3. Comment. Earlier in the week, Mboweni had cited
rising oil prices, concerns about low savings rates,
rising household debt, and increased consumption rather
than investment fueling growth as potential problems
facing the South African economy. Out of 24 economists
polled by Reuters on October 13, 22 said they expected
interest rates to remain unchanged because of surging oil
prices. End comment.

TOURISM EARNS MORE FOREIGN EXCHANGE THAN GOLD
---------------------------------------------

4. Research from Standard Bank indicates that tourism
is growing in importance to the South African economy,
earning more in foreign exchange in 2003 (R53.9 billion,
$8.3 billion, using 6.5 rands per dollar) than net gold
exports (R35.3 billion, $5.4 billion). Standard Bank's
research suggests that tourists are more influenced by
economic growth in their own countries than the rand's
level, which implies that the sector is resilient to the
rand's strength, especially when compared to the mining
sector. The report estimated that for every 1 percent
increase in a country's GDP, the number of tourists from
that country who visit South Africa would increase by 1.73
percent. On the other hand, a 1 percent increase in local
currency prices would decrease tourist arrivals by only
0.04 percent. The relatively small impact on prices can
be partly explained by the composition of tourists
visiting South Africa. In 2003, more than half of South
Africa's tourists came from other African countries, and
those tourists from countries whose currency is pegged to
the rand (Swaziland, Lesotho, Namibia and Botswana)
comprised 20 percent of total foreign tourist spending.
For these tourists, their demand would be less sensitive
to overall price changes, since the prices they pay are
not influenced by the rand exchange rate and their local
markets are limited and expensive. Standard Bank
estimates that tourist arrivals could increase 3 percent
next year, more than double last year's growth rate of 1.2
percent. Even if the rand remains at current levels,
tourist arrivals should grow by more than 2 percent.
Source: Business Day, October 12; Standard Bank Insight,
October 11.

RECORD SOUTH AFRICAN EXPANSION COULD LAST TWO YEARS
--------------------------------------------- ------

5. The Credit Guarantee Insurance's (CGI) latest economic
and business review suggests that the current five-year
South African expansion could last two more years. Lower
structural inflation meant lower interest rates could last
into 2005 and beyond, but this depends on oil prices and
domestic secondary-round price increases being muted.
Despite a 'strong' exchange rate, the manufacturing sector
is expanding rapidly and business confidence indicators
are at an all-time high. Luke Doig, senior economist at
CGI warned that protectionist policy, a substantially
weaker rand, and over-regulation all serve to raise costs
and divert attention away from satisfying the real needs
of consumers. CGI is forecasting a 2.8 percent GDP growth
rate this year from 1.9 percent last year and expects
growth to accelerate to 3.7 percent in 2005. Source: I-
Net Bridge October 12.

6. Comment. The highest GDP growth rate in post-
apartheid South Africa (since the April 27 1994 elections)
was 7.7 percent in the second quarter of 1996. The
average GDP growth over the past 10 ten years is 2.8
percent. Now South Africa has recorded 23 consecutive
quarters of economic growth, with the previous record for
consecutive positive quarterly GDP growth at 44 quarters
occurring in the early 1960s. End comment.


HOUSING PRICES CONTINUE TO INCREASE
-----------------------------------

7. The ABSA Bank house price index in August continues to
show record growth, increasing a nominal 33.7 percent,
y/y, its highest in 23 years. Helped by strong growth in
household incomes and low nominal interest rates, property
prices reflect increased demand. As a result of the sharp
increase in residential property prices during 2003 and
the first nine months of this year, ABSA decided to lift
the upper cut-off price for residential properties in the
middle market from R1.8 million ($280,000) last year to
R2.2 million ($340,000) this year. The upper cutoff price
in the luxury market was increased from R6.5 million ($1
million) in 2003 to R8 million ($1.2 million) this year.
ABSA's real (adjusted for inflation) housing price index
indicated that there was 32.7 percent year-on-year growth
in August compared to July's 30.9 percent increase.
Source: Business Day, October 12.

CAPACITY UTILIZATION INCREASES
------------------------------

8. The capacity utilization for large manufacturers
increased to 84.2 percent in May 2004 up from 83.3 percent
in February according to Stats SA. The rise of 1.1
percent or 0.9 percentage points was mainly due to higher
demand. The largest rise was reported in food and
beverages (up 2.4 percentage points) followed by motor
vehicles and parts (up by 2 percentage points). Source:
Business Day, October 12.

CARBON TRADING TO BEGIN IN SA
-----------------------------

9. Subject to approval from South Africa's JSE Securities
Exchange, Sterling Waterford Securities will list carbon-
trading credits by the end of 2004. The carbon credits
allow companies in developed countries trying to meet
stringent carbon controls to buy credits from companies in
countries that pollute less than their allotted limits.
The draft National Energy Bill, legislation already
approved by the cabinet, will establish a designated
national authority to handle carbon credits with regard to
the Kyoto protocol. Currently, the price of carbon
credits is between $3 and $7 a ton. Currently, South
Africa has the third-highest per capita rate of emissions
of greenhouse gases in the world. Russia is expected to
provide most of the carbon credits to the market. Source:
Business Day, October 11.

MANUFACTURING PRODUCTION SHOWS ROBUST AUGUST GROWTH
--------------------------------------------- ------

10. Manufacturing production increased 6.8 percent (y/y)
in August, its strongest growth in nearly two years,
compared to July's growth of 5.2 percent. From April 2003
until February 2004, manufacturing production slipped into
recession, with March being the first month of positive
growth. On a quarterly basis, 8 of the 10 manufacturing
industries showed stronger growth, with the fastest growth
occurring in the glass, food and beverages, motor
vehicles, petroleum and chemical products. However, there
are signs of weakening growth. When measured monthly on a
seasonally adjusted basis, manufacturing production growth
and manufacturing sales declined 0.8 percent and 0.3
percent respectively between July and August. The August
quarterly growth in manufacturing production reached 2
percent, down from July's quarterly growth of 2.5 percent.
Source: Business Day, October 13; Standard Bank
Manufacturing Unpacked, October 12, September 7;
Statistics South Africa Statistical Release P 3041.2.

11. Comment. The manufacturing sector, accounting for 18
percent of gross domestic product, weakened in 2003 due to
stagnant global growth and the strong rand. However,
strong domestic demand caused by low interest rates and
improving export outlook has boosted manufacturing growth
prospects for 2004. End comment.

BUILDING CONFIDENCE SURVEY HIGH
-------------------------------

12. The Bureau for Economic Research's confidence index
for residential building contractors show most building
contractors expect activity to improve this quarter.
However, 89 percent of those surveyed complained about a
shortage of skilled labor. Confidence of residential
contractors scored 87, close to the record high of 90
reached in the second quarter 2004 and confidence among
nonresidential contractors rose to 74, also close to the
second quarter's level of 72. Skill shortages could lead
to an increase in wages for the sector, especially given
strong growth in both housing and retail construction.
Source: Business Day, October 13.

IMPROVED RANKING IN WORLD ECONOMIC FORUM'S COMPETITIVENESS
INDEX
--------------------------------------------- -------------

13. The latest annual World Economic Forum's (WEF)
competitiveness survey ranks South Africa 42 out of 104,
an improvement of just one place over last year. Now,
however, South Africa is the most competitive economy in
the continent, ahead of Botswana, which dropped nine
places. Ranked highest in Africa, South Africa's ranking
is still below many of its competitors, such as Chile,
Poland and Estonia. Ranking 22, Chile was the only South
American country to rank above South Africa, with Mexico
only 48. The survey comprised 8,700 business leaders and
emphasized macroeconomic environment, the quality of
public institutions and technological innovation. The
four components of WEF's Global Competitiveness Index
(GCI) show a varied picture for South Africa, with the
country ranked 40th on technology, 48th on macroeconomic
environment and 35th on public institutions. South
Africa's best performance is in business competitiveness,
where it ranked 25th, based on the strength and regulation
of its financial markets, corporate governance and
"general effectiveness" of government policies. According
to WEF, South Africa's competitive disadvantages include
labor market issues, such as ease of hiring foreign labor,
hiring and firing practices and flexibility of wages.
HIV/Aids and crime are also cited as negatives. Source:
This Day and Business Report, I-Net Bridge October 14.

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