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Cablegate: South Africa Economic Newsletter December 30 2005

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INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 PRETORIA 005034

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DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR OAISA/RALYEA/CUSHMAN
USTR FOR COLEMAN

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER December 30 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:

- SNO Needs R9 Billion to Start;
- Growth in 2006 GDP May Slow as Consumer Demand Eases;
- Will the Rand Stabilize?;
- SA's Major Banks Increase Market Share;
- SA, China Close to Agreement to Limit Textile Imports;
and
- Land Restitution Spending Increases
End Summary.

SNO Needs R9 Billion to Start
-----------------------------

2. The second national telephone operator (SNO) licensed
earlier in December will need a capital investment of
about R9 billion ($1.4 billion, using 6.3 rands per
dollar) before it can start commercial operations planned
for the third quarter 2006, according to a recent Merrill
Lynch study. Although details of the funding are still
being discussed, the SNO's 26% strategic equity partner,
Tata Holdings, has already spent R1.5 billion ($240
million) while parastatals Eskom Telecommunications and
Transtel, which own 15% each in the SNO, have spent R2
billion ($320 million) on network capital expenditure.
Black economic empowerment firm Nexus, which at 19% holds
the second-biggest stake in the SNO, would have to fund
all or part of the remaining R5.5 billion ($873 million).
The Independent Communications Authority of South Africa
issued the SNO with a 25-year renewable license to provide
public-switched telecommunications services to about 14
specific areas. The second operator will use Telkom's
network for a period of two years after its launch.
Telkom will also have monopoly of the local loop for at
least two more years after the launch of the second
operator. Whereas Telkom's operating license requires it
to provide a service to every person in South Africa who
requests it, the SNO is obliged only to make services
available to the 14 network service areas. The second
operator, which still does not have a name, is required to
ensure availability of services to 50% of the population
within the 14 network areas in the next five years. It
also has to ensure that 80% of the entire South African
population can access its services after 10 years. Other
license requirements include providing high-speed internet
connectivity to at least 2,500 schools and 2,500 rural
clinics. Merrill Lynch forecasted that because of delays
in the launch of the SNO, it would take only 2.5% of
Telkom's market share by 2007, down from the bank's
initial estimate of 4%. Telkom had projected that it
might lose 10%-15% of its market share to the second
operator in the next five years. Source: Business Day,
December 27.

Growth in 2006 GDP May Slow as Consumer Demand Eases
--------------------------------------------- -------

3. South Africa's GDP growth is expected to ease to
slightly below 5% in 2006 from just above 5% this year, as
consumer demand consolidates. The median forecast for
2006 is 4.9% with a range of 4.5% to 5.3%. Household
consumption expenditure is forecast to slow to 5.5% next
year from 6.9% in the first three quarters in 2005, 6.5%
in 2004, and 3.5% in 2003. The slowing in consumer demand
is corroborated by recent slowdown in real retail sales
growth with September 2005 slowing to 4.7% y/y increase
after 8.2% y/y rise in August and 2005's peak y/y gain of
9.3% y/y in April. With growth optimists, exports become
a key determinant in attaining higher growth. For the
first three quarters in 2005, exports increased 13.2%
after a 2.5% gain in 2004. South African exports of bulk
commodities increased by 10.6% y/y in November to a record
10.8 million tons. Those expecting lower growth fear that
a possible interest rate increase will constrain consumer
demand, and that government promises of increased fixed
investment will not happen. General government fixed
investment only grew by 4.2% y/y in the first three
quarters of 2005 compared with a 12.0% gain in 2003, which
slowed to 6.3% in 2004. Source: I-Net Bridge and Sunday
Times, December 27.

PRETORIA 00005034 002 OF 003

Will the Rand Stabilize?
------------------------

4. In 2005 the South African rand has shown less
volatility than in the previous three years, prompting
speculation that the rand will settle around a relatively
narrow range of R6.35-6.70 per dollar for 2006. The South
African rand has lost about 12 percent against the dollar
in 2005 to date, its first depreciation over a calendar
year since 2001 and a relatively mild move after three
straight years of hefty gains. In 2002 the rand increased
40% against the dollar, in 2003 it added 28%, and in 2004
the rand increased another 18%. The rand's swings have
also moderated recently. In 2005 it ranged between a high
of 5.617 to the dollar, reached early in January, to a low
of 6.977 in June, a difference of 136 rand cents. In 2004
its range was about 200 rand cents, in 2003 almost 300
rand cents and in 2002 it was 410 rand cents. In December
2001, when it reached 13.84 to the dollar, the currency
was extremely volatile, gaining around 200 rand cents
alone in the last 10 days of the year. In 1998, when the
Asian currency crisis hit, the rand's range was only 200
rand cents between its high and low, illustrating that
2005 might be the beginning of a stable rand. Increased
liquidity has helped, with the average daily turnover in
the country's foreign exchange market has increased from
$3.8 billion in the first quarter of 1998 to $13.8 billion
in the third quarter 2005. Improved credit ratings and
growth prospects have also helped stabilize the rand,
along with increased foreign direct investment in 2005.
Monetary policy has kept inflation under control, with the
consumer price index measure monitored by the South
African Reserve Bank within its 3% to 6% target range for
27 straight months. With commodity prices expected to
remain high and growth prospects favorable, the rand
should become more stable, perhaps attracting even more
foreign investment. Source: Reuters, December 27.

SA's Major Banks Increase Market Share
--------------------------------------

5. South Africa's four largest banks continued to
increase their market share, according to data from the
South African Reserve Bank (SARB). In October 2005, First
National Bank (FNB) has the largest market share in five
of the eight categories monitored by the SARB. FNB has
47.8% of the commercial credit card market and 26.5% of
the individual market. However, Standard Bank still has
the largest market share in the credit card market,
although they lost a large share of the commercial market
during October. Nedbank has a market share of 14%,
compared with ABSA's 23%, FNB's 27% and Standard Bank's
34%. ABSA dominates the mortgage market at 32%, although
FNB (17%) is also providing stiff competition. ABSA also
has the highest share of the overdraft market (31%),
although they lost some market share from September to
October. Source: Business Day, December 28.

SA, China Close to Agreement to Limit Textile Imports
--------------------------------------------- --------

6. The South African government is about to conclude a
voluntary restraint agreement with China to limit imports
of Chinese clothing and textile products, according to
Trade and Industry Deputy Minister Rob Davies. Davies
said signature of an agreement on the same lines as that
reached between China and the European Union (EU) earlier
in 2005 was imminent. The voluntary restraint agreement
between the EU and China intends to limit the growth in
imports of 10 Chinese textiles and clothing products 8%-
12.5% a year until the end of 2008. About four months ago
the textile industry (with trade unions backing), sought
government support for the imposition of WTO safeguards.
WTO safeguards allow for the temporary re-imposition of
quotas on Chinese clothing and textile imports if they
increased to such an extent that they harmed domestic
industries. However, the South African government has
been reluctant to involve WTO safeguards as South Africa
exports basic commodities to the Chinese market. Both
labor and business have blamed the large increase in
Chinese imports for the decline of the industry, which has
lost an estimated 55,000 jobs since 2003. Source:
Business Day, December 28.

PRETORIA 00005034 003 OF 003

Land Restitution Spending Increases
-----------------------------------

7. The Land Affairs Department spent R1.017 billion ($160
million) on land restitution in 2004-05, up from R727
million ($115 million) in 2003-04. According to its annual
report, the department also spent R327 million ($52
million) on land reform programs, compared to R347 million
($55 million) spent in 2003-04. Land department programs
(including administration, surveys and mapping, spatial
planning and cadastral surveys which show the extent and
measurement of every block of land), and land reform and
restitution programs cost about R2 billion ($320 million)
in 2004-05, up from R1.6 billion ($254 million) in the
previous year. Source: I-Net-Bridge and Business Day,
December 29.

TEITELBAUM

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