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Cablegate: South Africa Economic Newsletter December 17,

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 005407

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 DECEMBER 17,
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:

- Third Quarter Bulletin Released;
- AmCham Survey Shows Empowerment Risks;
- Electricity Regulator Limits Price Increase;
- New Micro Finance Fund Started;
- Fraudulent Grant Recipients Can Receive Indemnity Until
March; and
- Employment and Earnings Continue Growing.
End Summary.

THIRD QUARTER BULLETIN RELEASED
-------------------------------

2. The South African Reserve Bank (SARB) released the
third quarter 2004 Quarterly Bulletin, which gives a
comprehensive picture of the economy by focusing on demand
determinants of gross domestic product (GDP) as well as
financial indicators. From a demand perspective, the
composition of GDP and economic growth indicate strong
growth in the local economy. In the third quarter, GDP
increased by 5.6 percent (annualized, q/q), helped by
strong growth in consumption and the export sector. Gross
domestic expenditures, which exclude the foreign trade
sector, increased by 2.3 percent as household consumption
and investment continues to show strong growth at 6.7 and
2.4 percent, respectively. Investment growth slowed
substantially in the third quarter compared to 10.4 and
5.5 percent growth in the first two quarters of 2004. The
deceleration in total fixed investment is largely
attributable to transactions by South Africa Airlines, in
which aircraft acquired on financial lease contracts
during the first half of the year were changed into
operational leases with a non-South African entity. The
aircraft had to be recorded as exports and negative
capital formation in the third quarter after initially
being recorded as imports and capital formation. Private
sector investment increased 13 percent in the third
quarter, reflecting optimism as shown by recent business
confidence indices. Government consumption showed
stagnant quarterly growth of 0.1 percent, due to large
government purchases of ships in the second quarter.
Exports and imports increased 13.9 and 0.7 percent
respectively, explaining the much higher growth of GDP.
Most analysts expect GDP to grow above 3.5 percent this
year, with above 4 percent growth expected for 2005.
Apart from expenditure data, the Quarterly Bulletin
provides income, savings and inflation information. The
savings data was revised substantially, incorporating
additional information from a wider variety of sources.
Over the past three quarters, gross savings as a percent
of GDP has increased, although household debt increased
and savings to disposable income has declined, reflecting
the rise in consumer spending. South African savings was
14.7 percent of GDP during the third quarter is
substantially less than many of its peer countries
(Malaysia at 42 percent, Thailand at 31 percent, Chile at
27 percent and Singapore at 45 percent). The ratio of
household savings to disposable income has also declined
from 1.2 in the first quarter 2004 to 0.9 in the third
quarter. Inflation expectations continue to remain within
the targeted range of 3-6 percent for the next two years,
even though unit labor costs increased for the third
consecutive quarter. Source: Standard Bank QB Crux,
Investec SARB Quarterly Update, December 10; SARB
Quarterly Bulletin December 2004; Business Report,
December 13.

3. Comment. Two weeks ago, Stats SA released revised and
rebased GDP figures from the production side. SARB
provides GDP composition from the demand side, showing
consumption growing faster than previously thought.
Revised household consumption increased 6.1 and 6.3
percent in the first and second quarters compared to
previous growth of 4.9 and 4.3 percent, respectively. At
least part of this increased consumer spending was funded
by credit as reflected by increasing household debt to
disposable income. End comment.

AMCHAM SURVEY SHOWS EMPOWERMENT RISKS
-------------------------------------

4. A survey of US firms belonging to the American Chamber
of Commerce in South Africa (AmCham) shows that 74 percent
of US companies views selling equity as part of black
empowerment strategy as a negative factor in their
investment decisions in South Africa. The survey also
shows that 50 percent of US firms plan to invest more in
South Africa next year, while 62 percent said the business
environment was either good or excellent, up from 50
percent last year. Thirty-four percent of AmCham's 177
members responded to the survey. Trade and Industry
Director General Lionel October said the survey reflected
"a lack of understanding about the implementation of
empowerment" and acknowledged that the government has to
explain the empowerment strategy more clearly. October
also stated that if a foreign company has a policy not to
sell shares in its overseas subsidiaries, the government
would accommodate that company. Source: Business Day,
December 14.

5. Comment. Last week, the Department of Trade and
Industry released drafts of three codes of good practice
providing guidelines on Black Economic Empowerment
Framework, Equity Ownership and Management. The Black
Economic Empowerment Framework introduces a new generic
scorecard recommending that companies achieve 25.1 percent
BEE equity levels, 40 percent black management, 50 percent
procurement from black-owned firms, and 50 percent
equality in employment. The Equity Ownership provides
guidance on different types of ownership and voting rights
and the Minister will include a Statement on equity
ownership for multinationals. A Statement is a formal
clarifying principle within a Code. Public comments on
these codes will be accepted for the next 60 days. It is
not known when the Statement on equity ownership for
multinationals will be released. End comment.

ELECTRICITY REGULATOR LIMITS PRICE INCREASE
-------------------------------------------

6. The National Electricity Regulator (NER) approved an
average electricity price increase of 4.1 percent for
2005, lower than the initial 6.4 percent increase it
initially approved in October, effective January 1. NER
spokesman said one of the key determinants of the approved
tariff increase was the fact that Eskom would be required
to repay the large returns earned when Eskom sold more
electricity than expected when the price increases of 8.5
percent increases were approved. In 2003, Eskom earned a
profit of R3.5 billion ($463 million, using 7.56, the
average exchange rate in 2003) on R32.8 billion ($4.34
billion) in revenues. Source: Business Day, December 14.

NEW MICRO FINANCE FUND STARTED
------------------------------

7. The Department of Trade and Industry announced the
launch of the South African Micro Finance Apex Fund, which
will provide small loans to individuals and small
businesses. Loans up to R10,000 ($1,750, using 5.7 rands
per dollar) are available through intermediaries as well
as financing advice and support, working with cooperatives
and savings groups. The fund hopes to improve
entrepreneurial and financial skills and experience so
that small enterprises can begin to improve employment and
income levels. Source: Business Day, December 13.

FRAUDULENT GRANT RECIPIENTS CAN RECEIVE INDEMNITY UNTIL MARCH
--------------------------------------------- ----------------

8. People receiving social grants fraudulently have until
the end of March to apply for indemnity or face possible
imprisonment. About 37,000 people are suspected to be
enjoying state benefits illegally. Examples include about
1000 foster-care parents receiving grants for children
older than the eligible age, and more than 10,000 others
who are under investigation for receiving old age grants
before the official retirement age. "The home affairs
department has also informed us that there are over 14,400
cases of children who, according to the (department's)
records, are indicated as deceased, but people continue to
collect the child support grant," said Justice Department
Director General Vusi Pikoli. Social Development Minister
Zola Skweyiya said untested information had recently
revealed that about 50,500 government employees or
beneficiaries of the government pension fund were also
receiving social grants. Government spends about R50
billion on providing social security to more than 9
million beneficiaries every year. Source: Business Day,
December 14.
EMPLOYMENT AND EARNINGS CONTINUE GROWING
----------------------------------------

9. The September Survey of Employment and Earnings (SEE)
shows the average earnings growth per employee in the
formal non-agricultural business sector reached 5.4
percent between the quarter ended September 2003 and
September 2004 compared to 7.9 percent between the quarter
ended June 2003 and June 2004. Employment increased 3.7
percent in September, showing an increase of 234,000 jobs
compared to September 2003 and a gain of 112,000 over June
2004's jobs. June's survey showed a 2.5 percent increase
in employment. The gross earnings paid to employees
during the quarter ended September 2004 amounted to 136.76
billion rand, which is an annual increase of 9.3 percent
compared with the June 2004 quarter's annual increase in
gross earnings of 10.6 percent. Since June 2004, the
highest number of jobs created occurred in the personal
services sector (66,000 new jobs), followed by wholesale
and retail trade (15,000), manufacturing (14,000),
construction (11,000) and the financial sector (7,000).
Growth in consumption of services, motor vehicles,
property and durable and non-durable goods have exceeded
GDP growth over the past year. Source: I-Net Bridge,
Standard Bank, SEE, December 14; Business Day, Business
Report, December 15.

10. Comment. South Africa has three official ways of
measuring employment statistics: the population census,
which surveys all households, completed every five years;
the labor force survey of a sample of households published
twice a year; and the Survey of Employment and Earnings,
which is a sample of firms in the non-agricultural formal
sector (those firms registered for value-added taxes) and
published every quarter. Firm-based surveys, like the
SEE, generally do not keep up with the changing structure
of employment without frequent sample revision. For
example, the growth of the information technology sector
in the 1980s and 1990s was not included in the SEE sample
until 2002. The SEE has reported employment gains for the
past two quarters, although some argue that the amount of
jobs created comes short of halving the current
unemployment rate of 27.8 percent by 2014. Roughly
500,000 additional jobs per year are needed to reach the
government's goal. End comment.

FRAZER

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