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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.

231452Z Sep 05




E.O. 12958: N/A
September 23 2005 ISSUE
1. Summary. Each week, Embassy 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:

- Credit Blacklist Review;
- IMF Report on South Africa;
- IMF Increases Growth Prospects for Africa;
- Business Confidence Up Despite Oil Prices;
- Water Price Increases Expected;
- Manuel Complains About SMME Underspending; and
- SA Concludes Free Trade Agreement with EFTA.
End Summary.


2. The Department of Trade and Industry (DTI) introduced
a new clause in the National Credit Bill, still being
considered by Parliament, requiring DTI to produce
regulations on how the credit bureaus maintain, verify and
remove information about consumer debt. Proponents of
removing all negative credit data from credit bureaus'
databanks assert that blacklisting results in further
indebtedness of the poor, who are then charged much higher
interest rates using unconventional loan sources. DTI
proposals include the deletion of default and judgment
information for amounts under R100 within the first three
months of the regulations' implementation and a one-time
deletion of information on paid-up judgments older than
three years. Source: Business Day, September 19.

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3. The International Monetary Fund (IMF) released its
annual Article IV report on South Africa, projecting 3.4
percent growth over the next five years without any major
policy interventions. The IMF report praised the short-
term South African economic outlook, but noted that South
Africa faces major long-term challenges, namely high
unemployment, widespread poverty and high prevalence of
HIV/AIDS. Several recommendations for increasing economic
growth and job creation included: relaxing centralized
collective bargaining, simpler minimum wage system, and
streamlining dismissal procedures; further liberalization
of tariffs; and increased privatization of state-owned
enterprises. The report described several possible growth
scenarios, with one scenario accelerating structural
reforms (labor market reform, trade liberalization, public
enterprise reforms with increased privatization) and
another scenario highlighting South Africa's public sector
debt sustainability. The IMF report asserted that if
accelerated reforms were enacted, South African growth
would reach 5.5 percent by 2010 and the unemployment rate
would fall to 18.3 percent from its current level of 26.5
percent. The scenario testing of South Africa's debt
sustainability concluded that South Africa's external debt
position and financing needs are robust to a range of
shocks, reflecting a relatively low level of debt and
favorable debt structure. Source: Sunday Times,
September 18; Business Day, September 19;


4. Despite HIV/AIDS, the working-age population in sub-
Saharan Africa should increase substantially in the next
40 years, holding out welcome prospects for faster growth
and healthier investment, according to the International
Monetary Fund (IMF). In its twice-yearly World Economic
Outlook, the IMF predicted that sub-Saharan African
economic growth should reach 5.9 percent in 2006, compared
to 4.8 percent and 5.4 percent in 2005 and 2004,
respectively. Growth of 5.9 percent would be the
strongest expansion in sub-Saharan Africa since the early
1970s. The IMF attributed the expected slowdown in 2005
to weaker rises in non-oil commodity prices than were
enjoyed in 2004, notably in the cotton sector. Favorable
2006 growth prospects are explained by the start of
operations at new oil production facilities in Angola and
Mauritania and higher oil production in Nigeria. People
of working age today account for slightly under 55 percent
of the overall population, whereas that figure was closer
to 50 percent in 1990. But in 2050, according to the IMF,
sub-Saharan Africa's working-age population should
constitute 65 percent of the total. The report described
South Africa's prospects as favorable, with growth
projected at 4.3 percent in 2005 from 3.7 percent in 2004,
but decreasing to 3.9 percent in 2006. Risks to South
Africa's growth include deterioration in commodity export
prices, elevated housing prices and high unemployment.
Nigerian growth is expected to slow to 3.9 percent this
year from 6 percent in 2004, and improve to 4.9 percent in
2006. Source: SAPA-AFP, Business Report, September 22.

5. Business confidence rose to near 24-year highs in the
third quarter, buoyed by strong domestic demand and low
interest rates, despite steep oil prices and domestic
strikes. The index, which is compiled by the Bureau for
Economic Research at Stellenbosch University, and
sponsored by Rand Merchant Bank (RMB), rose to 86 points
in the third quarter 2005, compared to 82 in the previous
quarter. Business confidence has been in positive for 15
successive quarters, and the index reached a 23-year
record of 88 in the third quarter of 2004. Confidence in
the manufacturing sector increased in the third quarter,
to 68 from 61 in the second quarter, surprising many
analysts. During the previous 18 months business
confidence in manufacturing remained in the low 60s, far
below other sectors, which had readings between 80 and 90.
The strong rand over the past three years has impacted
exports of the manufacturing sector (accounting for about
16 percent of gross domestic product (GDP). The recovery
in the manufacturing sector has also been reflected in
Statistics SA's latest GDP figures. The sector grew 7.3
percent in the second quarter, after contracting 1.9
percent in the first quarter. Confidence rose in four out
of five of the sectors covered for the index. In addition
to the manufacturing sector, new vehicles dealers'
confidence increased to 99 from 94 in the second quarter.
The building sector recorded confidence of 94,
wholesalers' confidence rose to 84, while retailers'
sentiment remained largely unchanged at 85. Source:
Business Day, September 21.


6. The South African government was considering
increasing water prices to reduce waste by the country's
bulk water users, according to Water Affairs and Forestry
Minister Buyelwa Sonjica. Price increases were likely to
come into effect with the new national water-pricing
strategy in July 2006. The expected increases will affect
commercial farmers, municipalities, electricity utility
Eskom, forestry companies and companies such as Sasol.
The changes will apply to raw or untreated water.
Commercial farmers currently pay about 3 rand cents a
cubic meter to extract water for irrigation, one of the
lowest costs in the world, considering government's
expenditure on infrastructure such as dams. Irrigation
accounts for 50 percent of South African water use.
Sonjica said an increase in the tariffs was likely to
force the industrial sectors to reduce their water use.
The closing date for comment on the proposed reforms is
September 30. Source: Business Day, September 21.


7. Finance minister Trevor Manuel said that the
government had set aside R1.4 billion ($222 million, using
6.3 rands per dollar) in 2005 to help small, medium and
micro enterprises (SMMEs), but not enough money was
filtering through to the small business sector. Manuel's
comments came on the same day that the Department of Trade
and Industry (DTI) was to present to the cabinet a new
strategy aimed at revitalizing the SMME sector. The
strategy, which seeks to reduce red tape, improve access
to finance for SMMEs, and advance black economic
empowerment, is likely to result in extra funding request
by DTI. However, Manuel seemed to think that the R1.4
billion was adequate, as the government had to focus its
resources on other priority areas such as health,
education and housing. Manuel stated that the days of
granting tax incentives to large industrial projects that
did not create jobs were over. The strategic investment
program has been cut, after it created 7,000 direct and
110,000 indirect jobs. Treasury also cut plans to
introduce special tax incentives in the country's four
industrial development zones, which the DTI had hoped
would boost their investor appeal. Since their beginning
in the late 1990s, the four zones (Coega, near Port
Elizabeth, East London, Johannesburg and Richards Bay)
have attracted less than R3.5 billion in planned
investments despite the government spending more than R4
billion on building their infrastructure. Source:
Business Day, September 22.


8. South African exports will have duty-free access to
European Free Trade Association (EFTA) members starting
next year under a recently concluded free-trade agreement.
EFTA members are Switzerland, Norway, Iceland, and
Liechenstein. South Africa already agreed to a free-trade
agreement with the European Union. The agreement allows
South African clothing manufacturers to use imported
fabric and still qualify for the duty-free and quota-free
access to EFTA markets. Negotiations started early in
2003 and the goal is for the agreement to become effective
July 2006. Southern Africa Customs Union negotiators look
to restart free trade talks with the United States next
week in Gaborone. Source: Business Day, September 22.


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