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Cablegate: South Africa Economic Newsletter November 19,

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

UNCLAS SECTION 01 OF 04 PRETORIA 005043

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 19,
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:

- Foreign Exchange Reserves Target Published Next Year;
- Street Traders Important to Farming;
- Survey Reveals Informal Sector Importance;
- New Forum Started to Advise SMMEs;
- Local Car Manufacturers Create 1,519 Jobs;
- SA is World's Sixth-largest Wine Producer;
- Holiday Season Expected Best in 20 Years;
- 100,000 Mzansi Account Holders; and
- 6.5 Percent of GDP Spent on Red Tape.
End Summary.

FOREIGN EXCHANGE RESERVES TARGET PUBLISHED NEXT YEAR
--------------------------------------------- -------

2. A standing committee will be established to determine
an appropriate level for South Africa's foreign exchange
reserves and would publish its recommendations in 2005,
according to Lesetja Kganyago, the Treasury Director-
General. To develop the reserves target, a formula that
considered current account deficit forecasts as well as
short-and long-term government debt would be used. The
committee, comprised of National Treasury and Reserve Bank
officials, would also be responsible for coordinating the
government's debt management strategy with that of
reserves management. South Africa has gradually grown its
gross reserves to $13 billion, prompting Moody's to
consider upgrading the country's investment grade next
month. Compared with emerging market peers such as Turkey
and the Czech Republic, South Africa's reserves are
minimal, as both peer countries have gross reserves in
excess of $20 billion. The International Monetary Fund
recommends that a country must hold reserves that can
cover three months of imports. From June through August
2004, South African imports totaled $12.4 billion.
Source: Business Report, November 15.

STREET TRADERS IMPORTANT TO FARMING
-----------------------------------

3. The latest issue of Farmer's Weekly emphasizes the
importance of informal traders to the agricultural sector.
Informal traders buy 43 percent of potatoes and 23 percent
of all market produce. While no formal research had been
completed on the market share of vendors in fresh produce
markets, Agricultural Business Chamber Chief Executive
Tobias Doyer estimates a 30 percent share. The informal
trader has become such a strong market player in the fresh
produce distribution network that business training is now
provided by most markets, including Tshwane's (greater
Pretoria) Fresh Produce Market, the second largest after
Johannesburg's market. Source: Business Day, November
16.

SURVEY REVEALS INFORMAL SECTOR IMPORTANCE
-----------------------------------------

4. The University of South Africa and the University of
South Carolina collaborated on a survey of the informal
retail sector in South Africa and found that these
informal businesses were more sustainable than previously
thought. The survey covered 800 businesses, ranging from
spaza shops (small retail stores in former township areas)
to shebeens (bars) and hawkers (street vendors) that did
not pay value added tax. The study found that these
enterprises had an average monthly turnover (a measure of
sales) of more than R5,300 ($880 using 6 rands per
dollar). More than half of the owners of South Africa's
informal businesses said they would not look for a job in
the formal sector if they had a choice. Spaza owners
ranked soft-drink sales more important than bread in
contribution to sales and the informal sector generated
between 40 and 50 percent of Coke's R3 billion ($500
million) sales in South Africa. Approximately 35 percent
of survey respondents were unemployed before starting
their businesses and 70 percent used savings, 10 percent
used money from separation packages and 2 percent used
bank financing to start their businesses. Most of the
money earned went to replenishing stock merchandise with
very little going into capital outlay. Approximately 40
percent of respondents had no refrigeration and only 8.2
percent received formal business training. Source:
Business Day, November 16.

NEW FORUM STARTED TO ADVISE SMMES
---------------------------------

5. The Small, Medium and Micro Enterprises (SMME) Forum
will advise small start-up businesses, aid training and
lobby government on SMME's behalf. Originally established
to encourage small business input into several empowerment
charters, its efforts are now expanded to provide more
services to entrepreneurs and to large companies looking
to procure services from SMMEs as well. The forum would
help small enterprises by collecting tender information,
offering legal advice, providing online training and
helping to collect unpaid debts. The forum plans to
establish a database of small, reliable suppliers by
economic sector and has a policy that member companies
cannot remain members forever, as they are expected to
grow into larger enterprises. Source: Business Day,
November 16.

LOCAL CAR MANUFACTURERS CREATE 1,519 JOBS
-----------------------------------------

6. According to the latest quarterly review of business
conditions released by the National Association of
Automobile Manufacturers of SA (NAAMSA), a total of 1,519
jobs were created in the new vehicle manufacturing
industry in the first nine months of 2004, an improvement
of 4.9 percent on the corresponding period last year.
These latest employment trends follow a report on the
automotive industry released last week by the Trade and
Industry Department, stating that total automotive
industry employment, including the assembly, component and
tire industries and motor trade, increased by 2 percent to
303,700 in 2003. Recent developments in the South African
car market include Volkswagen's contract to produce the
new Golf A5 for the local and export markets and Toyota's
Durban plant being named as one of five facilities
worldwide that will produce a new-generation light
commercial vehicle. In addition, Nissan SA was awarded a
R1 billion ($167 million) contract to export locally
assembled Hardbody pick-ups to Europe, Singapore,
Australia and New Zealand, starting in October 2005. The
influence of the strong rand and highly competitive global
market conditions contributed to lower vehicle exports
during the first nine months of 2004. From January to
September, 2004 exports declined 13.3 percent (11,288
vehicles) compared to the first nine months of 2003.
Source: Business Report, November 16.

SA IS WORLD'S SIXTH-LARGEST WINE MANUFACTURER
---------------------------------------------

7. South Africa is the world's sixth-largest wine maker,
at 2.8 percent of global production and with gross output
of wine-related firms estimated to be worth R14.6 billion
($2.4 billion) a year. In 2001, there were 4,390 primary
wine producers and 388 cellars, an increase of 15 percent
since 1999. About 746 million liters of wine were made
annually from 314 million vines. On average, 71 percent
of production found its way into good wine (for drinking),
an increase from 65 percent in 1999. In the late 1990s,
there was considerable foreign investment in Western Cape
vineyards, large-scale replanting and quality
improvements, which led to a boom in exports. Exports
grew to 210 million liters in 2002, from 50.7 million
liters in 1994, and accounted for 33.5 percent of good
wine production, up from 14.6 percent in 1995, with the
total export value for wines in 2001 estimated at R4.5
billion ($750 million). About 50 percent of bottled wine
exports were to the United Kingdom, 21 percent to the
Netherlands, 9 percent to Scandinavia and 6.5 percent to
Germany. Markets identified as growth opportunities
include the United States, India, China and Japan.
Approximately 43 percent of tourists to South Africa visit
the vineyards with the wine industry indirectly
contributing over R3.5 billion a year to tourism.
Viticulture contributed 30 percent to the Western Cape's
horticultural income and about 3 percent of its gross
regional product. Source: Business Report, November 16.

HOLIDAY SEASON SALES EXPECTED BEST IN 20 YEARS
--------------------------------------------- -

8. South Africa's holiday season retail sales in the
fourth quarter, which covers the Christian Christmas
season, as well as the Hindu Diwali festival, the Muslim
Eid festival and the Jewish Hanukkah festival, should be
the best in at least 20 years, according to the Ernest &
Young Festive Season Retail Trends survey covering 500
retailers by the Bureau for Economic Research (BER) at the
University of Stellenbosch. Retail sales are expected to
grow by 17.4 percent (y/y) during the holiday season, the
highest increase since 1987, compared to 10.2 percent
(y/y) growth during 2003. Increases in both prices and
volume of goods sold should fuel the expected growth in
retail sales. Volumes of goods sold should increase by
11.7 percent and prices should increase by 5.1 percent.
During last year's holiday season, units of goods sold
increased by 8 percent while prices increased by 2.1
percent. Income for both high and low-income individuals
should increase. The BER survey defines high-income
individuals as those earning R4500 ($750) per month or
higher. Investment income, tax rates, and interest rates
impact high-income earners. Low-income earners benefit
more from higher wages, social grants and low food costs.
While wage earnings as a proportion of personal disposable
income has declined over time, from 81 percent in 1990 to
72 percent in 2003, the importance of social grants and
investment income has increased. Social grants accounted
for 7 percent of disposable income in 2003, compared to 5
percent in 1990. In 2003, investment income's share of
disposable income was 35 percent compared to 27 percent in
1990. The study also estimates that black adults comprise
1.8 million of the 4.5 million high-income earners in
South Africa this year. Source: I-Net Bridge, November
16; Business Day and Business Report, November 17.

9. Comment. Previously, Statistics South Africa reported
real retail sales 9.1 percent for the first half of 2004,
and increases in monthly retail sales of over 10 percent
for July and August. Real wholesale trade sales for the
first half of 2004 increased by 7.2 percent. Given
expectations of continued strong retail sales growth, 2004
GDP growth should be much higher than 2003's 1.9 percent.
End comment.

100,000 MZANSI ACCOUNT HOLDERS
------------------------------

10. Since the October 25 Mzansi account launch, more than
100,000 people have opened the new bank account aimed at
low-income customers. Although these accounts are aimed
at lower income individuals, estimates suggest that nearly
R30 million ($5 million) have been deposited. Eight banks
are offering these accounts to the estimated 13-16 million
eligible South Africans without accounts, with ABSA and
Standard Bank leading by opening 30,000 accounts each,
Nedbank and PostBank opening 10,000 and 15,000,
respectively. Spokesmen from both Standard Bank and
Nedbank could not estimate how many of the new Mzansi
accounts were switched from existing accounts and stated
that additional study is needed. Source: Business Day,
November 17.

6.5 PERCENT OF GDP SPENT ON RED TAPE
------------------------------------

11. SBP, a non-profit independent private sector research
company (originally Small Business Project), developed a
survey of 1,800 firms that examines the cost of regulatory
compliance to South African firms. The survey covered
most economic sectors including firms in manufacturing,
mining, construction, trade, agriculture, and services
sectors. Among the key findings include: (1) total cost
to business of complying with regulations is R79 billion
($1.3 billion) in 2004, 6.5 percent of GDP; (2) 34 percent
of businesses believe that regulations inhibit business
growth; (3) 20 percent of employers say that labor law and
government regulations constrain increases in employment;
(4) businesses report that the most troublesome and time
consuming regulations are VAT, other aspects of tax
administration, labor laws, SETA/RSC taxes (SETA is fee
paid by business for labor training and RSC is a regional
services council tax), in that order; (5) 76 percent of
respondents say that compliance costs have increased in
the past two years; (6) large firms pay the most in
absolute terms, but regulatory compliance costs weigh more
heavily on smaller enterprises--compliance costs represent
8.3 percent of turnover (a measure of sales for restocking
purposes) for firms with turnover of less than 1 million
rand a year, and 0.2 percent of turnover for corporations
that turnover 1 billion rand or more a year; and (6) the
impact of red tape is greatest in transport, services and
tourism and least in retailing and wholesaling. The SBP
survey looks at two kinds of regulatory costs faced by the
private sector - efficiency costs and compliance costs.
Efficiency costs occur when regulations distort the
market, such as when labor market legislation affects
employment and output, or when a business decides to limit
sales in order to stay below the VAT threshold.
Compliance costs are purely the costs of red tape,
including management time, interacting with authorities,
paperwork and professional services and consultants' fees.
They do not include tax payments or levies. Source: I-
Net Bridge, November 17.

FRAZER

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