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:
- No Change in Interest Rates;
- IMF Seep Progress in Economic Fundamentals but
Inequality Still Problematic;
- 39 Percent of Manufacturers Have Closed Export Capacity;
- SA's Labor Force Declines Due to Discouragement and
- BEE Transactions Double Though Benefiting Few;
- October Manufacturing Growth Leveled;
- Current Trade Conditions Still Predict Growth;
- Net Reserves Increase by 14 Percent in November; and
- Union Criticizes Motor Vehicle Sector's BEE Exemption.
End Summary.


2. The South African Reserve Bank's (SARB) Monetary
Policy Meeting (MPC) kept its key lending rate steady at
7.5 percent, mostly in line with market forecasts. This
means the prime rate remains at 11 percent. SARB's
governor Tito Mboweni expects inflation could increase
somewhat in 2005, but should remain comfortably within the
target range of 3 to 6 percent. Mboweni cited the
following indicators as possible future reasons for an
increase in inflation: (1) the decline in growth of labor
productivity from 3.3 percent in the first quarter 2004 to
0.5 percent in the second quarter; (2) the recent strong
growth in money supply (14.9 percent in October); and (3)
the high growth of total loans of the banks to the private
sector (15.1 percent in October). Combined with strong
growth in demand in the third quarter, the MPC left
interest rates unchanged. Two thirds of economists
surveyed by I-Net Bridge expected no change in rates,
while the rest forecasted a 50 basis points cut. The
announcement came at the same time that the Bureau for
Economic Research at the University of Stellenbosch
released its findings of the inflation expectation survey.
The survey differed very little from the third quarter,
with overall inflation expectations remaining in the
SARB's 3 to 6 percent target range for a second time in a
row. Source: I-Net Bridge, December 9; Statement of the
Monetary Policy Committee, December 9.

3. Comment. Even though the rand has strengthened 5.1
percent against the dollar in November alone, fears that
strong consumer demand along with wage increases already
negotiated being just above the 6 percent range made the
SARB reluctant to reduce interest rates just before the
holiday season. Recent press statements by SARB Governor
Mboweni emphasized that the Bank would not lose its focus
in targeting inflation. End comment.

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

4. The International Monetary Fund (IMF) released its
annual report on South Africa and noted that South African
growth should increase over the short to medium term as
monetary easing, a moderate expansionary fiscal policy,
increases in investment and strong domestic demand provide
a solid base for over 3 percent growth. The IMF expects a
modest increase in inflation over the next twelve months
and views adjustments in interest rates likely. The IMF
views recent increases in South Africa's net international
reserves as crucial since the closure of the SARB's
forward book in the foreign exchange market in February
2004, and considers further increases in reserves as
desirable in order to help reduce currency volatility and
keep long-term interest rates low. In response to strong
domestic demand and the currency appreciation, the
external current account position reversed from a surplus
of 0.6 percent of GDP in 2002 to a deficit of 0.8 percent
of GDP in 2003; however, South Africa continues to attract
inflows to easily finance its current account deficit.
Increased government expenditures have provided counter
cyclical support and helped address South Africa's social
problems. "The authorities agree that a government
deficit in the region of 3 percent of GDP should be
considered the upper limit of what is desirable to
maintain macroeconomic stability and to keep indebtedness
under control," the IMF said. Universal provision of
antiretroviral HIV/AIDS drugs through the public health
system is an important example of increased government
expenditures. The annual report also emphasizes the
importance of policies designed to reduce income and
wealth disparities and encourages progress in both black
empowerment programs and land reform as being crucial to
maintain social cohesion. In order to reduce
unemployment, the IMF report stated that labor market and
tax reforms and increased competition were necessary. The
IMF staff recommends that steps be considered to
decentralize the collective bargaining system so that
small and medium-sized enterprises gain more autonomy in
setting wages. It is, moreover, concerned that increases
in minimum wages have aggravated the unemployment problem,
particularly in the agricultural sector. "The government's
skills development program could be strengthened by
relying less on labor levies as a source of funding and by
focusing more on training those presently unemployed," the
IMF said. The IMF staff urged that further liberalization
of the tax regime be undertaken and that implementation of
the privatization program, which has come to a halt, be
stepped up. Source: I-Net Bridge, December 2.

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

5. Thirty-nine percent of South African manufacturers
have closed down export capacity permanently over the past
two years as the rand has moved from above 13 rand per US
dollar in December 2001 to below 6 rand per dollar. The
Bureau of Economic Research (BER) at the University of
Stellenbosch found these results during its survey of
1,100 manufacturers conducted between October 25 and
November 22. Other survey results included: (1) 28
percent "suffered a decline in export volumes"; (2) 16
percent managed to maintain export markets, if not grow
them; and (3) 14 percent managed to "continue growing
export volumes" over the past two years. The BER noted
that the global economy has been in a growth phase over
the past 18 months, with growth being exceptionally strong
during the second half of 2003 and the early part of 2004.
In some sectors, production for export is being switched
to the domestic market as 25 percent of the respondents
indicated that this has been their company's response over
the past two years. Since the manufacturing sector
contributed more than half of export revenues in 2003, the
implied loss of export capacity suggests larger economic
costs tied to the strength of the currency. BER expressed
concern that the strong rand is indirectly fueling
domestic expenditure while constraining local production
(because of the low cost of imports) leading to unbalanced
and unsustainable growth. It recommends that the South
African Reserve Bank (SARB) should accumulate reserves
more aggressively. The SARB should also consider easing
interest rates to close the gap with interest rate levels
abroad, currently inviting volatile money inflows on the
capital account of the balance of payments. When asked to
give their view on what constituted the optimal level of
foreign reserves for South Africa, 48.9 percent of the
survey participants said six months import cover, 28.9
percent said one year's import cover, 16.7 percent said
three months import cover and only 5.6 percent said three
years' worth. Source: I-Net Bridge, December 2.

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

6. South Africa's labor force has declined over the past
few years, probably because more people have given up
looking for work or are infected with HIV, says a new
report in the South African Reserve Bank's (SARB) Labor
Market Frontiers report. South Africa's labor force
participation rate, which counts the number of people
working and actively seeking work as a proportion of the
total population, dropped to 54.1 percent in September
2003, down from 58.9 percent in September 2000. Official
figures from Statistics SA show that unemployment dropped
to 4.6 million in September 2003 from 5.3 million in March
2003, based on the narrow definition of unemployment where
an individual had been actively seeking work prior to the
survey. The drop in unemployment was not matched by an
increase in total employment over that period, with more
people dropping out of the labor market. The number of
discouraged job seekers increased the unemployed figure to
more than 8 million. The SARB's report states that job
seekers were discouraged because of the slim chances of
finding a job, or because they lacked funds to search
actively for work. Another likely cause for a drop in
labor market participation was the effect of HIV/AIDS.
The report points to research that shows a drop in
HIV/AIDS prevalence among younger people in their
twenties, and an increase in higher age groups, making up
most of the labor force. The report also assesses whether
social grants have a negative incentive on labor force
participation, but found mixed results. Some studies show
that pension payments cause an indirect effect of
withdrawal from the labor market. However, other studies
show that a child support grant could result in higher
labor force participation. Source: Business Day,
December 3.


7. Black economic empowerment deals this year increased
to an estimated R80 billion ($14 billion using 5.7 rands
per dollar) amid debate that only a small black elite was
benefiting from the transactions. This was more than
double the R40 billion worth of empowerment deals
concluded last year, fuelled mainly by black economic
empowerment charters. Trade and Industry Minister Mandisi
Mpahlwa stated that 72 percent of last year's deals had
involved at least one of the top six empowerment
companies, Mvelaphanda, Shanduka, ARM, Kagiso, Tiso and
Safika, adding weight to concerns that government's
current empowerment strategy is not broad-based enough.
Trade and Industry Deputy Director-General Lionel October
estimated that the number of recorded deals had doubled
this year from last year's 118. Apart from the financial
sector, key sectors contributing to the huge deal-making
this year included information technology, retail and
manufacturing. Mpahlwa said the average reported value of
all the transactions last year was R515.3 million ($90
million), and the largest transaction in terms of rand
value last year was the ARMGold and Avmin deal worth R10.6
billion ($1.86 billion). The use of vendor financing,
inflows of foreign capital and the involvement of the
Industrial Development Corporation were among the
financing mechanisms used. Source: Business Day,
December 7.


8. Both manufacturing production and sales declined on a
monthly basis (seasonally adjusted) at -0.7 and -1.0
percent, although when compared to figures from last
October, they grew 5.3 and 11.4 percent respectively.
October 2004's year-on-year growth shows high growth
compared to a low base last October. The manufacturing
sector experienced a recession from April 2003 to February
2004, and October 2003's manufacturing production declined
by 2.3 percent. On a quarterly basis, 7 out of 10 sectors
reported improvements, with the greatest contribution to
manufacturing output growth coming from food and
beverages. Production growth was also strong in the motor
vehicle, paper, wood, and furniture industries. The
textile sector and communication equipment reported the
largest decline in both production and sales, as
competition from cheaper imports is especially severe in
these industries. Source: Standard Bank, Manufacturing
Unpacked December 7; Business Day, December 8.


9. Started in 2000, the South African Chamber of Commerce
and Standard Bank publish two monthly trade indices
measuring South African trade activity and expectations.
November's indices still indicate growth, although
expectations have marginally decreased from October's
level. The trade activity index increased to 56 compared
to October's level of 50, with sales volumes and new
orders showing the highest growth in November. Sales
volumes indicate strong November growth even when
seasonally adjusted, confirming that domestic demand
growth remains quite strong. The survey showed that
inflation (selling prices) slowed in November, although
purchase prices (prices of inputs) increased. Since 2000,
the employment component of the activity index has rarely
exceeded 50, a value indicating expansion in employment.
November's value of 51 indicates modest expansion,
although employment growth may reflect seasonal increased
hiring. The trade expectations index also predicts
expansion at 60, although it has declined marginally from
September and October's values of 63 and 61 respectively.
There is strong expectation that growth in both sales
volumes and new orders will increase over the medium term,
although not as strong as in October. Traders expect that
both selling and purchasing prices will increase over the
medium term, with selling price increases moderating.
Employment prospects remain positive at 53, the fourth
consecutive month of expanding employment expectations.
Source: Standard Bank, SATMI, December 7; Business Day,
December 8.

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

10. The South African Reserve Bank's (SARB) net reserves
increased by 14 percent in November to $11.02 billion.
The SARB increased its purchases to $1.3 billion compared
to its October purchase of $962 million. Gross gold and
foreign exchange reserves increased to $14.425 billion
compared to October's level of $13 billion. According to
Nedcor economist Magan Mistry, the current level of
reserves will cover about four months of imports and
Mistry expects that the bank will continue to increase
reserves until six months of imports are covered. On
average, the rand appreciated 5.1 percent against the
dollar in November, and with continuing rand strength and
higher gold prices, further increases in reserves are
expected in December. Source: Standard Bank, Foreign
Reserves Alert, December 7; Business Report, December 8.

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

11. The National Union of Metalworkers of SA (NUMSA) has
criticized the motor sector's original equipment
manufacturers' exemption from Black Economic Empowerment
(BEE) since the companies were not South African-based.
In October, Trade and Industry Minister Mpahlwa stated
that the government would allow multinationals in the
motor vehicle sector to commit to their own BEE
initiatives rather than forcing them into a single
approach. Since multinationals comprised the majority of
the vehicle assembly and component manufacturing sectors
and alliances were formed with both upstream and
downstream producers, government was open to negotiation
regarding BEE ownership requirements for original
equipment manufacturers. NUMSA views that since these
companies derive benefits from the government's motor
industry development program, they should not be exempt
from following the government's BEE policies. NUMSA wants
to establish an empowerment charter, code of conduct,
standards and monitoring mechanisms for the industry as a
whole. Nico Vermeulen, executive director of the National
Association of Automobile Manufacturers of SA reported
that representatives of the motor vehicle industry were
finalizing a sectoral approach to BEE and expects
additional discussion with all stakeholders in the near
future. Source: Business Report, December 8.


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