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.




E.O. 12958: N/A

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:
- Manufacturing Growth for Eighth Consecutive Month;
- Rise in Individual Credit Debt Unsustainable;
- Reserve Bank Increases Foreign Exchange and Gold Reserves;
- Real Wholesale Trade Sales Increase 18.1 Percent;
- Provincial Governments Project R2.2 Billion Deficit;
- September House Prices Increase 33.9 Percent; and
- Economic Inequalities Still Remain.
End Summary.

--------------------------------------------- ----

2. According to Statistics South Africa (StatsSA),
manufacturing production grew by 6.1 percent (y/y) in
September compared to August's 6.8 percent growth.
September's manufacturing sales grew by 12 percent. Third
quarter 2004's manufacturing production grew by 2.7
percent (seasonally adjusted) compared to second quarter
2004's 1.8 percent growth. Third quarter growth was
robust with eight out of ten manufacturing sub-sectors
reporting higher growth. The main contributors to third
quarter growth were the food, motor vehicle and furniture
sectors. Strong domestic consumption was the key reason
behind manufacturing growth, as the Euro zone's growth has
not been as strong as initially expected. Approximately
30 percent of South Africa's manufactured goods are
exported, and of these exports, roughly 35 percent go to
the Euro zone. Continued strength of the rand and
uncertain global oil prices constrain domestic producers
from raising their prices. Source: Standard Bank,
Manufacturing Unpacked, November 9; Business Day, Business
Report, November 10.

3. Comment. There are signs of manufacturing growth
leveling off in the near future. The Investec Purchasing
Manager's Index declined in October, (although it is still
above the 50 level, which signals activity expansion) and
the rand has recently strengthened. During October 2004,
the rand appreciated 2.5 percent, while the average
monthly change in 2004 so far is a 0.3 percent
appreciation. Lower than expected global growth may also
contribute to a possible slowdown in manufacturing
activity. ABSA economist John Loos believes that consumer
demand peaked in the third quarter and predicts consumers
to curtail future spending. Healthy growth is still
expected for manufacturing though lower than the current 6
percent monthly growth. Manufacturing contributes 18
percent to South Africa's economy and continuing expansion
in this sector is needed for sustained economic growth.
End Comment.


4. Efficient Research financial services group contents
that South African credit debt levels are manageable, but
current growth rates cannot be supported. Total credit
card debt in September 2004 was R3 billion ($500 million
using 6.1 rands per dollar) higher than the previous
September, with individuals accounting for most of the
increase. The amount owed on individual credit cards is
at the highest level yet at R18 billion ($3 billion).
Overall, total South African credit increased by R9.5
billion ($1.6 billion) in September compared to August
2004. However, the use of overdrafts by individuals
declined, indicating that savings on lower home (all of
South African mortgages issued use variable rates) and
vehicle loan rates were sources of financing increased
individual credit. Increased use of overdrafts is one
indication of credit overextension. Source: Business
Report, November 10.

--------------------------------------------- ------------

5. The South African Reserve Bank (SARB) increased
foreign exchange reserves, reaching US $11.3 billion in
October from $10.7 billion in September and $10.4 billion
in August. Gold reserves of $1.7 billion lifted total
gross reserves to $13 billion at the end of October. In
October, SARB bought $590 million worth of foreign
exchange and provided $372 million worth of financing for
repayment of a National Treasury euro-denominated loan.
Many economists believe that the SARB should have at least
$20 billion in foreign exchange reserves given that
average monthly imports have exceeded $4 billion this
year. From 1999 though February 2004, the foreign
exchange reserves had fluctuated around the $6 billion
level. In March 2004, reserves increased by $2 billion
and have been increasing ever since. Source: I-Net
Bridge, November 5; Business Day, November 8.

--------------------------------------------- ---

6. According to Statistics South Africa (StatsSA), August
real wholesale trade sales, excluding diamonds, increased
18.1 percent (y/y) compared to June and July growth of
16.7 percent and 10.6 percent, respectively. The three
months' (ending in August) seasonally adjusted real
wholesale trade sales increased 15.1 percent (y/y), as
wholesale inflation remained around 2 percent. In May
2004, StatsSA revised the company list that comprises
wholesale and retail trade data, saying that sales were
systematically under reported. The new list, based on the
value-added tax (VAT) database obtained from the South
African Revenue Service (SARS), covers all businesses in
South Africa expecting to reach sales of R300,000
($50,000) for a 12-month period. The coverage of the new
company list is greater than that of the old list.
Company information is provided by SARS and verified by
StatsSA. StatsSA has further plans to improve company
coverage by accessing corporate income tax records.
Source: I-Net Bridge, November 5.

--------------------------------------------- ------

7. Provincial governments are projecting a R2.2 billion
deficit ($361 million using 6.1 rands per dollar) in
expenditure in the FY2004, largely due to unexpectedly
high increases in the number of people receiving foster
care and disability grants. Those provinces not having
surplus funds will have to finance these deficits from
next year's budgets, as the national government's policy
is to not fund overruns of provincial budgets. In the
Medium-Term Budget Policy Statement, Finance Minister
Manuel announced an additional R4.3 billion ($705 million)
provincial appropriation for FY2004; however, the
projected aggregated R2.2 billion budget deficit takes
this into account. The Eastern Cape and Northern Cape
provinces are already operating on overdrafts, while some
provinces have already instituted cost containment
measures and other initiatives to ensure their deficits
are reduced to levels of available funding. Provincial
revenue this fiscal year included budgeted equitable share
spending not earmarked of R160 billion, conditional grants
of R21.2 billion and provincial revenue of R5.4 billion.
The figures on provincial spending for the first six
months of this fiscal year also showed slow spending of
capital expenditure. Provinces spent 29.5 percent (R3.3
billion) of their R11.3 billion capital budgets. Capital
spending in education was 23.2 percent and provinces spent
27.2 percent in health capital spending. The lowest rates
of capital spending were in Gauteng (6.4 percent),
Mpumalanga (11.9 percent) and Northern Cape (12.3
percent); Free State and Limpopo recorded the highest at
48.1 percent and 54.6 percent, respectively. Provinces
spent 52 percent of their R47.3 billion social development
budget by the end of September. Provincial spending on
social development rose from R20.9 billion in 2000-01 to
R42.4 billion in 2003-04, an annual average nominal growth
of 26.6 percent. Source: Business Day, November 8.

--------------------------------------------- --

8. Real house prices increased by 33.9 percent this year
through September, compared with a revised increase of
33.3 percent through August, according to the latest ABSA
bank house price index. Monthly house price increases
were on a declining trend, from 3.1 percent in January to
1.5 percent in September, indicating potential lower
growth in the near future. Relatively stable interest
rates this year, combined with the continuing rise in
house prices, already resulted in an increase in new
mortgage payments. Ultimately, rapidly growing housing
prices will increase housing costs leading to lower demand
for housing and lower growth in prices. The ABSA bank
house price index showed a nominal year-on-year increase
of 35.4 percent in house prices in October and the revised
increase of 35.6 percent for September, with the y/y
increase in the past 10 months averaging 32 percent.
Source: IOL, November 8.


9. The Economic Transformation Audit and Scorecard,
compiled by a panel of economic experts for the Institute
for Justice and Reconciliation, showed poverty and
inequality are still increasing in South Africa. The
Institute's calculations show that 58 percent of the South
African population and 69 percent of black South Africans
now live under the basic poverty level. Between 1996 and
2001, the study found that with poverty measured in terms
of income increased, more households fell below the basic
poverty line of R250 ($40) a day. Those living under the
mean (average) poverty line of R91 ($15) a day rose from
26 percent in 1996 to 28 percent in 2001, while black
South African per capita income as a percentage of white
income declined by 1.3 percent from the already low base
of 8.2 percent in 1996. The average black South African
now has less than seven percent of the income of an
average white South African. White and Asian shares of
the total income are growing again after a slight drop,
but the average white person is somewhat worse off,
indicating more poverty as well as wealth. Real household
income at the higher end of the income spectrum increased
(in all population groups), resulting in a widening in
inequality for the first time since 1975. Income of
households headed by South African women relative to those
headed by men increased by 4 percent since 1996. The
percentage of households with clean water and electricity
increased since 1996, although up to one third of the
population is still without these basic services. The
percentage of families living in permanent structures
decreased from 77.6 percent in 1995 to 73.8 percent in
2002, and the number of households increased during the
same period. Between 1995 and 2002, the percentage of
children at school decreased by 0.7 percent and the infant
mortality increased by 14 percent. The number of jobs
increased by 1 million during the same time frame,
however, due to a large increase in the labor force,
unemployment is now at 42 percent. Source: Sunday Argus,
November 7.


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