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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
July 22 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:
- BER Predicts 4.2% Economic Growth;
- Weak Rand, Foreign Investors Lift JSE to Record High;
- Reserve Bank Seals $1.5 Billion Loan Deal;
- South African Airways Flights Cancelled as Strike
- Pepsi Returns to SA;
- SABMiller To Become World's Third-Largest Brewer;
- Mboweni Outlines Monetary Union Based on Rand and Pula;
- Top-level Talks on Life Insurance Rulings;
- ICASA Forces Telkom to Cut Charges;
- Manufacturing Production Declined Sharply in May;
- Real Building Plans Rose by 60.3% in May; and
- Cement Sales up 10.3% in First Half of 2005.
End Summary.

BER Predicts 4.2% Economic Growth
2. Low interest rates, strong domestic spending and a
possible recovery in the export sector are likely to spur
economic growth to 4.2% this year. Data released by the
Bureau for Economic Research (BER) shows that gross domestic
product (GDP) growth, which accelerated to 3.7% last year,
is expected to rise in line with the government forecast of
4.3%. Bureau Chief Economist Pieter Laubscher warned,
however, that an uncertain international environment,
including terrorism, oil price volatility, and U.S. dollar
and interest rate uncertainty clouded the outlook.
Domestically, South Africa's current account deficit and
currency volatility remain a concern. The current deficit
stood at 3.8% of GDP in the first quarter of this year. BER
sees the economy growing at 3.9% next year, but a sharper
than expected increase in domestic interest rates and weaker
global economic growth could produce a more pronounced
domestic economic slowdown in 2006. BER forecasts that
while the rand may strengthen to R6.50 to the dollar, the
rand is likely to weaken to R7.50 next year due to weaker
commodity prices, higher international interest rates, and a
wider current account deficit in South Africa. Source:
Business Day, July 22.

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Weak Rand, Foreign Investors Lift JSE to Record High
--------------------------------------------- -------

3. The JSE Securities Exchange raced to another record high,
buoyed by a weaker rand and increased demand from foreign
investors. The all-share index topped out at 14,820.24 on
July 14 before closing at 14,779.75. Rumors that Citigroup
was interested in acquiring FirstRand's local bank, First
National Bank (FNB), also helped propel the local bourse
higher. When the rumor broke out on July 12, FirstRand's
stock gained 5.8% to R15.05 before closing at R14.90.
FirstRand's CEO Laurie Dippenaar confirmed there had been
talks with Citigroup as well as HSBC and Standard Chartered.
Analysts said they were optimistic about the prospects for
the JSE, which has gained 16% in the year to date, and said
equities remained the favored asset class in the long term.
Economist Colen Garrow said that foreign buying accounted
for almost R30 billion ($4.6 billion) so far this year.
Last year, foreigners bought R38 billion ($5.8 billion) in
JSE listed shares. Source: Business Day, July 15.

Reserve Bank Seals $1.5 Billion Loan Deal

4. The South African Reserve Bank has concluded a $1.5
billion dual-term loan which allows it to repay existing
debt at lower interest cost. According to Reserve Bank
Governor Tito Mboweni, SARB's loan was oversubscribed and
drew participation from more than 30 banks across the globe.
Tranche A is $1 billion with a three-year maturity and a
margin of 22.5 basis points over LIBOR (the London Inter-
Bank Offered Rate). Tranche B is for $0.5 billion with a
five-year maturity and a margin of 30 basis points over
LIBOR. "South Africa's attractiveness as a borrower is
reflected by the Moody's ratings upgrade in January this
year," said Mboweni. Rating agency Moody's upgraded South
Africa's credit rating from Baa2 to Baa1 with a stable
outlook, primarily based on the "strengthening" in the
country's foreign reserves position. The 24 mandated lead
arrangers (including Deutsche Bank, JP Morgan, and
Citigroup) initially committed $62.5 million each, but later
scaled back their commitment to $56 million. Source:
Business Day, July 19.

South African Airways Flights Cancelled as Strike Begins
--------------------------------------------- -----------

5. All South African Airways (SAA) flights leaving from
Johannesburg and Cape Town International Airports were
grounded Friday morning (July 22) as the airline's employees
embarked on a nationwide strike. Extremely long queues
formed at the domestic departures section of the
Johannesburg International Airport as a strike by ground
staff and cabin crew kicked off. Apologetic SAA managers
were walking up and down the queue explaining that the
strike was causing "chaos." Police were on standby, close
to the queues, but were not expecting any serious problems.
No crowds had gathered to picket at the airport. United
Association of South Africa (Uasa) said thousands of its
members would take part in the strike following a deadlock
in pay negotiations. Uasa is the largest representative
union of ground staff and cabin crew at SAA. It was not yet
clear whether members of fellow trade union, the South
Africa Transport and Allied Workers Union (SATAWU), were
also on strike. Both unions demand an 8% increase while SAA
is offering 5%. Source: Business Day, July 22.

Pepsi Returns to SA

6. A South African cola war is on the verge of breaking out
again with PepsiCo International's decision to enter the
local market for a third time. PepsiCo tried to return in
the 1990s, but, its partner, black empowerment company New
Age Beverages, went bankrupt owing PepsiCo $100 million. On
July 20, PepsiCo signed an agreement with beverage giant
Pioneer Foods that should result in Pepsi products finding
their way onto retail store shelves by December. Under the
agreement, the Pioneer beverage subsidiary, Ceres Fruit
Juices, will bottle and distribute the PepsiCo soft-drinks,
including Pepsi, Diet Pepsi, 7-Up, and Mirinda. Pioneer
produces more than 60 South African household foods and
beverage brands. Rival Coca-Cola supplied the South African
market through Swaziland during apartheid and has secured
an 80% market share. Source: Business Day, July 21.

SABMiller To Become World's Third-Largest Brewer
--------------------------------------------- ---

7. The owners of South America's No. 2 brewer, Bavaria SA,
agreed to a $7.8 billion stock swap and cash deal with
SABMiller that will create the third-largest brewer in the
world by volume and profit, behind InBev and Anheuser Busch.
SABMiller said it was buying a 71.8% stake in Colombia-based
Bavaria from the Santo Domingo family by issuing 225 million
shares worth about $3.5 billion. SABMiller will also pay
about $2 billion in cash and take on Bavaria's debt of $2
billion. After the announcement, SABMiller shares, which
had fallen in anticipation of a costly deal, were up 10.6%
in London. In Johannesburg, the stock was up 10.2% at a new
high of R114.5. SABMiller, which brews Miller, Castle, and
Peroni beers, said the combined group would have annual beer
volumes of about 175 million hectolitres and proforma
aggregated net revenues of about $12.5 billion. Source:
Business Day, July 19.

Mboweni Outlines Monetary Union Based on Rand and Pula
--------------------------------------------- ---------

8. On July 12, Reserve Bank Governor Tito Mboweni floated
plans for a monetary union among the members of the Southern
African Development Community (SADC) that would be based on
the South African rand and the Botswana pula. The 13-member
SADC bloc has agreed to create a common currency and a
regional central bank by 2016. African Harvest Fund
Managers Chief Economist Adenaan Hardien said such a
monetary union would require a common interest rate and
harmonized fiscal policies, which could be problematic --
"as some of the European Union countries are finding out."
Furthermore, SADC economies were at different stages of
development, so a one-size-fits-all monetary policy could
present problems, Hardien said. Mboweni argued that it
would make sense for the common monetary area of South
Africa, Lesotho, Swaziland and Namibia to form the basis of
a regional central bank, which could then invite other SADC
member states to join. The SADC consists of South Africa,
Angola, Botswana, the Democratic Republic of Congo, Lesotho,
Malawi, Mauritius, Mozambique, Namibia, Swaziland, Tanzania,
Zambia and Zimbabwe. Source: Business Day, July 13.

Top-level Talks on Life Insurance Rulings

9. The Financial Services Board (FSB) and the Life Offices
Association (LOA) held the first of a series of private
meetings as tension mounted between life insurers and the
pension funds adjudicator. Adjudicator Vuyani Ngalwana has
issued a spate of rulings over the past three months,
hammering the life insurance companies for poor disclosure
of costs they levy on retirement annuities. No details have
emerged as the meetings were deemed "private." Newly
appointed FSB head Rob Barrow declined to comment on the
outcome. This meeting came after the association, an
industry body representing life insurers, called on the FSB
as the regulator of the insurance sector to take urgent
action to resolve the looming crisis in the industry. As
the regulator governing the industry, the FSB regulates the
capital adequacy requirements of life insurers, but it does
not regulate product and costs. The life insurance
companies have appealed against a number of Ngalwana's
rulings, and the parties could decide on what steps to take
only after the high court had given judgment. It is
estimated that retirement annuities account for between 5%
and 25% of a typical life insurer's liabilities -- making it
an important leg of their business. Source: Business Day,
July 19.

ICASA Forces Telkom to Cut Charges

10. The Independent Communications Authority of South Africa
(ICASA) obtained government approval last week to cap
Telkom's price increases at 3.5% below inflation. The new
pricing cap is tougher than a previous price-rise limit of
1.5% below inflation. Telkom will cut the prices of some of
its services to comply with a regulator ruling capping its
overall rate of increase, spokesman Xolisa Vapi said. Vapi
did not say, however, which services would see lower
tariffs. Telkom's new prices, submitted to government in
response to ICASA's ruling, are likely to be announced as
early as July 25. Telkom has been criticized for charging
too much for calls, Internet access, stalling the roll-out
of phone lines and inflating the cost of doing business in
South Africa. Deputy Communications Minister Roy Padayachie
said at a meeting on telecommunications pricing that call
costs were one of the main barriers to foreign direct
investment and growth. Government has been chipping away at
Telkom's monopoly with new laws that let value-added network
operators offer cheaper calls over the Internet. However,
the Department of Communications has been accused of
dragging its feet over the launch of a second network
operator and critics say Telkom continues to dominate the
market and rip off customers. Telkom has slashed the cost
of international calls in recent months, as well as prices
for high-speed Internet access, but has offset this by
increasing local call tariffs and rental and connection
fees. Source: Business Day, July 18.

11. Comment: Based on a July 18 discussion document, ICASA
is also set to probe high mobile phone charges. Competition
between the three mobile network operators (Cell C, Vodacom,
and MTN) has failed to bring their tariffs down to an
acceptable level and the regulatory authority may impose a
one-off reduction in the fees or introduce more stringent
pricing policies. End Comment.

Manufacturing Production Declined Sharply in May
--------------------------------------------- ---

12. Manufacturing output fell by 2.6% on a seasonally
adjusted basis during May following strong growth in
previous months. Production of furniture, food and
beverages as well as clothing and textiles fell sharply by
8.7%, 6.0%, and 4.3%, respectively. Output of communication
apparatus and wood and paper products increased by 14.2% and
0.4%, respectively. Overall output increased by only 1.7%
in the three months ending in May compared with the previous
three months on a seasonally adjusted basis. Future
manufacturing output growth is expected to be relatively
subdued off the high base established in 2004. Source:
Nedbank, July 12.

Real Building Plans Rose by 60.3% in May

13. The real value of building plans passed in South Africa
rose by 60.3% year-on-year (y/y) in May 2005 to a record
R4.2 billion (all figures constant 2000 rand) compared with
a 79.4% increase in April 2005 to R3.6 billion, Statistics
South Africa reported. This brought the increase for the
first five months to 47.6%, which is substantially higher
than last year's upwardly revised 35.2% increase after only
an 11.3% rise in 2003. The largest increase in 2004 in the
value of recorded building plans passed was reported for
residential buildings (up 41.3%), followed by additions and
alterations (up 29.0%) and non-residential buildings (up
23.4%). The 2004 peak increase of 77.6% was set in February.
January 2004 was the only month last year, where the y/y
increase did not exceed 20%, while there were four months
when the y/y increase exceeded 45%. Source: I-Net Bridge,
July 20.

Cement Sales up 10.3% in First Half of 2005

14. South African cement sales for the first half of 2005
rose by 10.3% year-on-year (y/y) to 5.5 million tons, the
Cement and Concrete Institute (CNCI) reported. The increase
in June was 6.9% y/y of 1.07 million tons after May's 8.1%
y/y rise of 1.02 million tons after April's large 28% surge
of 972,000 tons. Cement sales rose only 2.1% y/y in March
2005 to 925,000 tons. Cement sales rose by 17.4% in 2004 to
a record 10.69 million tons compared with a 7.0% rise in
2003. Source: I-Net Bridge, July 20.


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