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Cablegate: South Africa Economic Newsletter

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 004876

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
NOVEMBER 5, 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:
- Trade Deficit Narrows;
- Tourism Increases Although Signs of Decline;
- Manufacturing Activity Slows;
- Another Strong Month for Vehicle Sales;
- Poverty in Africa Expected to Worsen by 2015;
- Real Health Care Spending 4.8 Percent Lower in 2003;
- Increasing Welfare Grants Crowd Out Other Government
Expenditures; and
- First Bank Account Identification Deadline Passed
End Summary.

Trade Deficit Narrows
---------------------

2. The trade deficit narrowed in September to R0.3
billion from a deficit of R3.1 billion in August,
recording its sixth consecutive decline this year. The
value of exports increased by 29.2 percent to R27.9
billion in September from August's R21.6 billion. The
value of imports increased by 14 percent to R28.2 billion
compared to August's level of R24.7 billion. For the
first nine months of this year, the cumulative deficit
stands at R6.6 billion compared with a R16.4 billion
surplus recorded during the same period in 2003. In
September, South Africa had a trade deficit with most of
the regions except for Africa and Oceania, with the Asian
trade deficit reaching R5 billion, the highest regional
trade deficit. South Africa had the highest trade surplus
within the African region, reaching R2.7 billion. In the
near future, imports are expected to remain high and
exports will be under competitive pressure. As oil
imports account for 10 percent of the country's total
imports, continuing high global oil prices will put
continuing pressure on growth in imports. In addition,
the recent rand strength implies that imports will be
high. The July, August and September monthly average rand
per dollar exchange rates were 6.09, 6.42 and 6.51
respectively. Even though the rand depreciated between
July and September, it has strengthened recently leading
most to expect a future deterioration in the current
account and increased pressure on exports. Source:
Standard Bank, Foreign Trade Alert, October 29; Business
Day, October 30.

TOURISM INCREASES ALTHOUGH SIGNS OF DECLINE
-------------------------------------------

3. According to Statistics SA, tourist arrivals increased
3.3 percent (y/y) in August, even though overseas tourist
arrivals declined by 2.1 percent. Visitors from Africa
increased by 4.6 percent and accounted for 71 percent of
the total increase in tourist arrivals. Visitors from six
neighboring countries make up more than 91 percent of
foreign visitors to South Africa. August's rand
depreciation had a greater impact on other non-neighboring
African arrivals since they view South Africa as a
shopping destination. The number of non-African visitors
to South Africa fell to 152,544 in August, with German and
French visitors dropping 14 percent and Spanish visitors
by 23 percent. Arrivals from the United Kingdom, the
leading country of origin of overseas visitors, increased
by 3.9 percent while U.S. visitors increased by 1.4
percent. The number of arrivals from China showed the
biggest increase, increasing 66.5 percent from 2,672 in
2003 to 4,450 in August 2004. The number of immigrants
arriving in South Africa increased 12.3 percent y/y in
August. Most immigrants came from Nigeria (133), Pakistan
(98), UK (93), Zimbabwe (88) and China (70). Of the total
immigrants to South Africa, 91 percent were not
economically active, as the majority were spouses and
students. Of those economically active, 41 percent were
managers, administrators or executives. Source: Business
Day, November 2; Standard Bank Tourism Gauge, November 1.

MANUFACTURING ACTIVITY SLOWS
----------------------------

4. The Investec Purchasing Managers Index, measuring
manufacturing activity, fell to 56 in October compared to
September's 59.1 level. This drop may indicate a future
slowdown in the manufacturing sector, which accounts for
roughly 20 percent of South African gross domestic
product. However, a value above 50 still signals
expansion. The Investec survey showed a decline in new
sales orders, with its index dropping to 58.9 compared to
September's value of 63.8. The employment index dropped
below 50, signaling future job losses. High oil prices,
slowing global demand, and the recent strength of the rand
are current growth constraints facing the manufacturing
sector. Helped by August's reduction in interest rates,
strong consumer demand should offset weakening exports.
Source: Business Day, November 2.

ANOTHER STRONG MONTH FOR VEHICLE SALES
--------------------------------------

5. According to the National Association of Automobile
Manufacturers (NAAMSA), motor vehicle sales increased 22.9
percent in October, with strong growth in commercial
vehicles fueling total vehicle sales growth. Passenger
cars increased 17 percent y/y, a rate slower than
September's 21.2 percent annual growth. An average of
1,087 new cars were sold each day in October 2004 compared
to October 2003's average of 895. Sales of commercial
vehicles grew by 35 percent in October, with bus sales
showing the highest growth at 46 percent. Lower
inflation, falling real car prices, and strong consumer
demand all explain 2004's substantially higher vehicle
sales. Source: Standard Bank Motor Alert, November 2.

POVERTY IN AFRICA EXPECTED TO WORSEN BY 2015
--------------------------------------------

6. Half of the world's poor will live in Sub-Saharan
Africa by 2015, despite significant inroads made in
reducing global poverty. This figure is up from 27
percent in 1999 according to the South African Institute
of Race Relations' latest issue of the South Africa
Survey. More than 400 million people are expected to live
on less than $1 a day in 2015, up from 315 million in 1999
while global poverty will be reduced by a third. The
report shows that regions such as South and East Asia will
show dramatic gains in reducing poverty because of the
faster growth of countries such as China and India. The
main reason for Sub-Saharan Africa's poor track record in
reducing poverty was a lack of good governance. South
Africa Survey shows that income levels in South Africa
have grown disparately among various race groups since
1960, with Indians gaining the most and whites showing the
lowest growth. Between 1960 and 2005, Indian incomes rose
384 percent, black incomes grew 208 percent, incomes for
coloreds increased 177 percent, while white incomes grew
66 percent. University graduation statistics shows
differences among race groups as well, with black students
comprising over half of university students, but making up
a quarter of business graduates, 28 percent of computer
science graduates and 22 percent of engineering graduates.
White students, accounting for 33 percent of the overall
university student body, make up 56 percent of business
graduates, 55 percent of computer science graduates, 65
percent of engineering graduates and 48 percent of
mathematical science graduates. South Africa was the only
developing country with low and declining levels of
entrepreneurship in 2003. The number of people employed
in the informal sector, which consists largely of
entrepreneurs, declined by 22 percent from 2000 to 2003.
Source: Business Day and I-Net Bridge, November 3.

REAL HEALTH CARE SPENDING 4.8 PERCENT LOWER IN 2003
--------------------------------------------- ------

7. The South Africa Survey shows that healthcare spending
in 2003 was 4.8 percent lower in real terms than in 1996,
with large inequities still existing between the
provinces. Some provinces spent as little as 75 rand
($1.23 using 6.1 rands per dollar) per capita per annum,
where the government goal is 200 rand. Two of the
provinces with the highest HIV/AIDS infection rates,
Gauteng and Mpumalanga, failed to spend all the money
allocated to them in conditional grants to fight the
pandemic in 2002/03. Gauteng spent only 52 percent of its
funds, while Mpumalanga spent only 38 percent. In 1995 an
estimated 85 percent of companies were providing benefits
to their pensioners, while in 2003 this number had fallen
to only 43 percent. The government increased the value of
the old-age social pension by 13 percent between April
2002 and April 2003. During the same period, the number
of beneficiaries of child support grants increased by 45
percent. Between 1997 and 2003, the number of welfare
grant beneficiaries in South Africa grew by 124 percent
from 2.5 million to 5.6 million. Source: I-Net Bridge,
November 3.

INCREASING WELFARE GRANTS CROWD OUT OTHER GOVERNMENT
EXPENDITURES
--------------------------------------------- -------

8. Welfare grants will comprise over 40 percent of the
government expenditure increases for the next three years.
Finance Minister Manuel allocated R20.8 billion ($3.4
billion using 6.1 rands per dollar) of the R50 billion
($8.2 billion) for welfare grants. Two million people
were added to the beneficiary lists for various grants
between April and September this year alone, pushing the
total number of recipients to nine million, about one in
five of the total population. Much of the increase was
in the unexplained escalation in disability and foster
care grants, which Manuel said was most likely due to poor
administration. Manuel said that in some provinces,
officials were adding applicants to the list without any
checks, families were registering their own children as
foster children and government officials were illegally
claiming childcare support for their own children. The
government has no figures on the number of people claiming
disability grants as a result of HIV/Aids and there are no
firm guidelines on their eligibility. In addition, there
are plans to raise the ceiling for child grants from 10 to
13 years through 2008. Welfare grant administration will
be shifted to a national social welfare agency in 2006,
but Manuel moved this week to limit the damage to other
services by shifting welfare funds from the equitable
share paid to provinces to the conditional grants that go
to these regional governments. The change would mean that
overruns would be the responsibility of the national
department even though distribution would remain a
provincial responsibility until March 2006. At present,
welfare claims take precedence over other provincial
expenditure. Provinces have had to cut back on critical
health and education budgets or have taken out bank
overdrafts to pay welfare grants expected to total R38.4
billion ($6.3 billion) in the current financial year,
rising to R47 billion ($7.7 billion) in the 2007/08 fiscal
year. In the financial year through March 2004, Northern
Cape overspent on welfare grants by 8.6 percent, KwaZulu-
Natal by 7.2 percent, Eastern Cape by 7.7 percent and
Gauteng by 4.1 percent. Western Cape and North West
provinces under spent in this regard. Source: Business
Times and I-Net Bridge, November 3.

FIRST BANK ACCOUNT IDENTIFICATION DEADLINE PASSED
--------------------------------------------- ----

9. The first "Know Your Customer" deadline for banks
based on the South African Financial Intelligence Center
Act (FICA) passed on October 31. All account holders for
trusts, partnerships and banks' 20 percent of its most
active clients were required to identify themselves to the
bank. If account holders have not presented themselves,
the banks are required to freeze the accounts within 15
days of the deadline. FICA is part of an international
effort to reduce money laundering by keeping track of
large financial transactions. In June, Finance Minister
Manuel set forth a revised timetable of "Know Your
Customer" deadlines. The next deadline for the remaining
most active clients is December 31, 2004. All medium to
low activity customers have to be identified before
September 30, 2006. Source: Business Day, November 1.

FRAZER

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