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 000949

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
March 4 2005 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:
- January Trade Deficit Widens;
- Mboweni Comments on SADC Regional Integration Targets;
- Higher State Spending and Oil Prices May Dim Chance for
Interest Rate Cuts;
- Money Supply and Credit Growth Remains High in January;
- Manufacturing Sector Shows Signs of Expansion in
February;
- February New Vehicle Sales Increase 32.5%;
End Summary.

JANUARY TRADE DEFICIT WIDENS
----------------------------

2. Preliminary figures released by South African Revenue
Service show January's trade deficit reached R3.4 billion
($577 million, using 5.9 rands per dollar), much higher
than the Bloomberg's survey median forecast of R1.3
billion. This was the ninth trade deficit in 10 months,
with December's trade surplus of R2.8 billion being the
only month of a positive trade balance. The current
account deficit, measuring trade in goods and services,
reached 2.3 percent of GDP in 2004 and the 2005 Budget
Review expects it to reach 3.1 percent in 2005. January's
trade deficit was primarily due to a 28.6 percent
reduction in exports, falling to R20.5 billion compared to
December's R28.6 billion. January's imports were 7.8
percent lower, at R23.8 billion compared to December's
R25.8 billion. Exports of base metals, mineral products,
precious stones and machinery explained the January's
export decline; imports of mineral products and motor
vehicles, aircraft and ships accounted for the import
reduction. Source: Business Day, March 1; Standard Bank,
Foreign Trade Alert, February 28.

3. Comment. The export sector was not a major source of
South African growth in 2004. The rand has appreciated 39
percent against the dollar since 2002, leading to 2004
import growth far exceeding export growth. As a result of
the strong rand and robust domestic demand in 2004, the
value of South African imports increased by 18.6 percent
due to increased imports of capital equipment. In 2004,
the import shares of machinery, vehicles and mineral
products were 26.1, 13.1, and 15.3 percent respectively.
Machinery imports increased 12.8 percent, vehicle imports
increased 34.5 percent, and imports of mineral products
increased 41.9 percent. The value of exports increased by
7 percent, primarily due to exports of precious and base
metals and mineral products. Textile exports declined by
20 percent and vehicle exports were stagnant, showing a
decline of 0.2 percent in 2004. Following several months
of trade deficits in 2004, most analyst expect continuing
months of trade deficits in 2005. End comment.

MBOWENI COMMENTS ON SADC REGIONAL INTEGRATION TARGETS
--------------------------------------------- --------

4. Following a meeting between Southern Africa
Development Community (SADC) central bank governors and
executives from the European Central Bank, South African
Reserve Board Governor Tito Mboweni highlighted the
importance of reaching convergence targets ahead of a
planned monetary union in 2016. The 13 SADC member
countries have agreed to achieve single digit inflation
figures by 2008, 5 percent by 2012 and 3 percent by 2018.
Convergence targets have been set on budget deficits, the
nominal value of public debt, external reserves and the
central bank credit. Planned SADC milestones include (1)
a SADC free-trade zone by 2008; (2) a customs union by
2010; (3) a common market by 2015; and (4) monetary union
by 2016. Mboweni hoped that SADC countries would declare
their commitments to lower inflation publicly, and
mentioned that Zimbabwean politics were having too great
an effect on the performance of its economy. Source:
Business Day, March 1.

5. Comment. The following table shows 2004 inflation in
SADC members having inflation above single digits and
highlights the extent of adjustment required to attain
inflation convergence by 2008.
Table 1. Selected SADC Member 2004 Consumer Price
Inflation
2004 Consumer Price Inflation
Angola 45.3%
Malawi 11.5%
Mozambique 12.7%
Zambia 18%
Zimbabwe 381.4%
End comment.

HIGHER STATE SPENDING AND OIL PRICES MAY DIM CHANCE FOR
INTEREST RATE CUTS
--------------------------------------------- ----------

6. The 2005 budget calls for a real 7.5 percent increase
in government non-interest expenditures and extended R11
billion ($1.9 billion) in tax cuts to individuals,
companies and small businesses. Government expenditure as
a percent of GDP should reach 28.2 percent in 2005/06
compared to 26.6 percent in 2003/04, signaling continuing
expansionary fiscal policy. The past two Monetary Policy
Committee statements expressed concern about inflationary
impacts of continuing strong consumer demand, postponing
interest rate reductions despite improvement in consumer
inflation. Increasing government expenditures, consumer
demand along with rising oil prices puts inflationary
concerns at the top of many economic analysts. Others
argue that South Africa's increasing government
expenditures are not cause for concern, as long as most of
it is spent on infrastructure rather than consumption.
Source: Business Day, February 28.

MONEY SUPPLY AND CREDIT GROWTH REMAIN HIGH IN JANUARY
--------------------------------------------- --------

7. January money supply and credit growth continue to
grow in double digits, not signaling a typical January
slowdown. Demand for private sector credit increased by
15.2 percent, a 13-month high, compared to December's
increase of 13.5 percent. The consumer credit categories
(installment sales, mortgage and leasing finance)
increased 23.6 percent compared to December's increase of
22.8 percent. M3 growth slowed to 12 percent compared to
December's increase of 12.8 percent, primarily because of
an increase in government deposits. Brait economist Colen
Garrow pointed out that the lowest nominal interest rates
in 24 years, R72 billion in income tax relief since 1995
and an increase in coverage of welfare and social security
benefits contributed to the strong growth in credit. With
rising oil prices, continued strong credit demand and
signs of improved manufacturing output growth, most
economic forecasters are now reluctant to predict future
interest rate reductions by the South African Reserve
Bank. Source: Business Day, March 2; Investec, Money
Supply and Credit Update, March 1.

MANUFACTURING SECTOR SHOWS SIGNS OF EXPANSION IN FEBRUARY
--------------------------------------------- ------------

8. The Investec Purchasing Managers Index (PMI) rose
above 50 in February signaling expansion in the
manufacturing sector. The index reached 54.2, a much
stronger indicator of manufacturing growth compared to
January's level of 49.3. Business activity and new sales
orders improved the most in February as consumer demand
growth remained robust, while the employment index
continued to show weakness. The employment index reached
48.9 in February, after January's 47.7, and it has
remained below 50 for most of 2004. The survey's six-
month expectations index worsened slightly, with the
percentage of respondents expecting an improvement in
general business conditions falling to 46 percent compared
to January's 47 percent. The manufacturing sector
contributes 16 percent of Gross Domestic Product and the
strong rand has impacted its 2004 growth. Manufacturing
output grew by 2.5 percent in the last quarter 2004,
compared to 6.3 percent growth in the third quarter.
Source: Business Day and Business Report, March 2.

FEBRUARY NEW VEHICLE SALES INCREASE 32.5%
-----------------------------------------

9. South African new vehicle sales in February 2005
increased by 32.5 percent year-on-year (y/y) to 42,832
units, compared to January's (y/y) growth of 20.9 percent.
The National Association of Automobile Manufacturers of
South Africa (NAAMSA) at the beginning of this year
expected growth slightly above 10 percent in 2005, but in
the first two months, growth has in fact been 26.6 percent
y/y. NAAMSA warned that the announcement in last week's
2005 Budget of changes to the car allowance taxation
provisions and the planned changes to the fringe benefit
tax treatment of company cars were expected to have an
impact on demand patterns and in particular, the more
expensive vehicle sector was likely to be negatively
affected. All types of vehicles showed robust February
growth. New car sales grew by 34.4 percent y/y, new light
commercial vehicle (LCV) sales rose by 28.5 percent y/y,
new medium commercial vehicle (MCV) sales grew by 49.5
percent, and new heavy commercial vehicle (HCV) sales grew
by 16.5 percent. NAAMSA said positive consumer and
business sentiment, stable interest rates and stable new
vehicle prices, together with an expected improvement in
the rate of growth in the South African economy for 2005
of over 4% provided conditions conducive to continued
growth in new car and commercial vehicle sales during
2005. Source: I-Net Bridge, March 2.

FRAZER

© Scoop Media