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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.

141120Z Oct 05




E.O. 12958: N/A
October 14 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:

- Interest Rates Remain Unchanged;
- August Manufacturing Production Rebounds;
- Consumer Confidence Still Strong;
- Cabinet Approves Plan for 6% Growth by 2010;
- Stats SA Plans to Revise Labor Force Survey; and
- Report Highlights Poverty among Black Youth.
End Summary.


2. Citing high oil prices, deteriorating inflationary
expectations, and higher global inflation as increasing
risks in meeting the 3-6% inflation target, the South
African Reserve Bank (SARB) decided to leave interest
rates unchanged at the October 12-13 Monetary Policy
Committee (MPC) meeting. A 1.3 percentage point increase
in CPIX (consumer prices minus mortgage costs) since the
last MPC meeting in August signaled increasing risks of
inflation overshooting the 6% ceiling. Although the
impact of substantially higher fuel costs have not yet
translated into higher prices in other goods and services,
the SARB felt that higher oil prices in the future would
pose a significant inflation risk. August CPIX increased
4.8%; while if fuel costs were excluded, CPIX increased by
only 3.6 percent. The SARB also cited the latest
inflations expectations survey by the Bureau of Economic
Research that indicates inflationary expectations
increased 0.3% and 0.4% in 2006 and 2007, respectively,
with CPIX inflation expected to reach 5.2% in 2006 and
5.4% in 2007. The SARB views that the deterioration in
the inflation outlook cannot be ignored, so the repurchase
rate remains at 7% and prime lending rates are at 10.5%.
The SARB still expects inflation to remain below the
ceiling, with peak inflation occurring during the first
two quarters in 2006, at a level just below 6%. The
market consensus expected SARB would not change interest
rates during the October MPC meeting. Source: IOL;
Statement of the Monetary Policy Committee; MPC Alert
Standard Bank, October 13.

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3. Comment. South African real interest rate is 3.1%
(the repurchase rate minus CPI inflation), while the
current U.S. real interest rate is 0.15% (federal funds
rate at 3.75 and US CPI inflation at 3.6%). Expectations
are that the U.S. will continue to increase interest rates
in November. End Comment.


4. August manufacturing production grew by 3.5%, up from
July's growth of 2.6%, due to strong consumer demand and a
weaker rand. The domestic consumer now buys 80% of
manufacturing output, and boosted growth in the
manufacturing sector throughout 2004 when South Africa's
main trading partner, the European Union experienced
slower growth and South Africa's rand strengthened 17%.
So far in 2005, the rand has depreciated 14% against the
dollar, leading to lower prices of manufactured exports.
On a quarterly basis, seven out of the 10 manufacturing
sectors reported higher growth ending in July 2005.
Quarterly manufacturing production increased by 1.2%
(seasonally adjusted), explained primarily by growth in
the furniture, motor vehicle, and petroleum sectors. The
motor vehicles sector contributed 0.8 percentage points to
the increase in total manufacturing production; petroleum,
chemical products, rubber and plastic products accounted
for 0.5 percentage points; furniture explained 0.5
percentage points. However, production decreases were
reported in the basic iron and steel, non-ferrous metal
products, metal products and machinery division (1.2
percentage points) and the textiles, clothing, leather and
footwear division (0.2 percentage points). Source:
Standard Bank, Manufacturing Unpacked, October 12;
Business Day and Business Report, October 13.

5. Comment. Recent leading indicators of manufacturing
activity, such as the Bureau of Economic Research's
Purchasing Managers' Index, has been trending lower in the
recent months from a peak of 60 in July to 55.7 in
September. The number is still above the critical value
of 50, which indicates that the sector should still grow
in the months ahead. The manufacturing data just
published is the last statistical release based on the
sample drawn from the new business register in 2004. Data
for September will be based on a new sample of
manufacturing enterprises, which was drawn in August 2005
and will take account of the latest developments in South
Africa's manufacturing sector. End comment.

6. Consumer confidence during the third quarter 2005
remained unchanged from the previous quarter, reaching 17
points, according to the First National Bank (FNB) and the
Bureau of Economic Research. This level is close to the
highest level recorded during the second quarter of 2004
when it reached 20. Consumer spending is expected to
remain strong for the next year or so, although higher
fuel prices could erode household purchasing power to some
extent, according to FNB Chief Economist Cees Bruggemans.
Low interest rates, consecutive personal tax rate cuts and
stable prices of durable and semi-durable goods have
strengthened consumers' ability to spend. Rising oil
prices have been the main reason for the rise in CPIX
(consumer price index less mortgage costs) although so far
only transport costs are affected. In August, CPIX, the
targeted measure of inflation, rose to 4.8% and is
expected to peak at around 5.5% in the first quarter of
2006. From June to August, when the third quarter
confidence index survey was conducted, the petrol price
increased 54 rand cents/liter. Although higher transport
costs and slowing house prices could slow consumers'
confidence in next quarter, these were offset by low food
prices, and a pick-up in employment on the back of higher
economic growth. Source: Business Day, October 13.

7. Comment. The range of consumer confidence index has
been from minus 36 to plus 20 over the past 30 years. The
average of the last three months has been at the top of
the range. End comment.


8. Cabinet approved a report from Deputy President
Phumzile Mlambo-Ngcuka's Economic Growth Task Team,
describing South Africa's plans to achieve accelerated
growth. Short on detail, the report forecasted a GDP
growth rate of 4.5% in the immediate term, projected to
rise to 6% between 2010 and 2014. The National Treasury
projected growth at 4.3% in 2005, although this could be
revised upwards when Finance Minister Trevor Manuel
delivers his medium-term budget in November. The South
African Reserve Bank and independent economists have said
a 4.5% GDP growth rate was feasible in the short term.
Government spokesman and Advisor to the President Joel
Netshitenzhe cautioned that 6% growth would only be
achieved in the medium-to-long term. Challenges including
infrastructure development, sector investment strategies,
education and skills development, second economy
interventions and improving the capacity of the state to
provide economic services had to be addressed. The
private sector would be expected to intensify investment
in job-creating sectors. Government would also try to
reform labor markets. Cabinet also agreed to phase out
import parity pricing and to introduce nondiscriminatory
pricing in some sectors. High input costs are identified
as one of South Africa's growth blockages, and
Netshitenzhe said "further work" would be done to lower
the costs of doing business. Cabinet also recommended
focusing government procurement of goods and services to
small businesses. Source: Business Day October 13.

9. Statistics SA (Stats SA) will introduce a revised
model of its labor force survey around 2008, responding to
recent criticisms by the International Monetary Fund
(IMF). There has been intense debate about the accuracy
of South Africa's unemployment statistics, which range
from the official rate of 26% to the broader measure of
41%, depending on the definition of unemployed. Those in
favor of a restricted definition, based on those actively
seeking work, argue that being without formal-sector
employment does not necessarily mean people are without
any form of work or income. Those in favor of an expanded
definition of unemployment argue that to exclude the many
discouraged job-seekers who have given up hope of finding
a job does not give an accurate picture of the extent of
unemployment in the country. The IMF pointed out certain
weaknesses in methodology that could lead to inaccuracies
in the measurement of employment and unemployment,
according to Stats SA's Deputy Director-General of
Statistical Support, Liz Gavin. One of the aims of
redesigning the labor market survey would be to
differentiate more precisely between types of jobseekers.
Source: Business Day, October 12.


10. A new report by the Human Sciences Research Council
highlights the difficulties in escaping poverty by black
South Africans aged 18 to 35. More than two-thirds of
black South Africans in this age group are unemployed and
more than two-thirds of young people who took part in the
survey had never had the opportunity to work. There was a
correlation between education and employment, 33% of those
with secondary and 5.1% of those with tertiary
qualifications were unemployed. Almost half of the black
youths who were not studying did not have the financial
means to continue their studies. The average number of
years taken to finish school was 60% higher than the
standard 12 years because many pupils were forced to
repeat grades or drop out of school. The report found
that personal contacts and networks remained a determining
factor in youth finding first employment. A third said
they found their first job through personal contacts, and
just 15% got a job through sending out their details.
Source: Business Day, October 12.


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