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 004456 
 
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 AFRICAN RESERVE BANK (SARB) SEPTEMBER 
2004 QUARTERLY BULLETIN 
 
 SUMMARY 
 ------- 
 
 ¶1. Summary.  The September 2004 South African Reserve 
 Bank's (SARB) quarterly bulletin reported mostly 
 positive developments in South Africa's macroeconomic 
 indicators for the second quarter of 2004.  Real 
 gross domestic product (GDP) growth continued its 
 over 3 percent growth, reaching 3.9 percent compared 
 to 3.6 percent in the first quarter 2004.  South 
 Africa's real GDP has now expanded for 23 consecutive 
 quarters.  Real household consumption increased by 
 4.3 percent.  Fixed capital formation grew by 10.4 
 percent, led by a 53.8 percent increase in public 
 corporation investment that accounted for 59 percent 
 of the quarterly change.  Private sector investment 
 also showed strong growth, increasing by 5.4 percent, 
 led by mining (especially platinum), agricultural and 
 manufacturing sectors.  After 22 years of consecutive 
 quarterly trade surpluses, South Africa's trade 
 balance reached a R5.5 billion deficit.  As global 
 growth recovered in the first half of 2004, the 
 export sector grew 42.3 percent (q/q) after two 
 consecutive quarters of over 9 percent declines; a 
 95.3 percent quarterly growth in imports, however, 
 restrained overall GDP growth.  End Summary 
 
 INTRODUCTION 
 ------------ 
 
 ¶2.  The September 2004 SARB's quarterly bulletin 
 includes data and commentary about the South African 
 economy up to the end of the second quarter 2004. 
 This cable summarizes bulletin highlights.  The full 
 quarterly bulletin is available at www.resbank.co.za 
 
 GDP GROWTH RECOVERS - DOMESTIC EXPENDITURES GROWTH 
 REMAINS HIGH 
 --------------------------------------------- -------- 
 
 ¶3.    Real gross domestic product (GDP) growth 
 continued its over 3 percent growth in the second 
 quarter 2004, reaching 3.9 percent compared to 3.6 
 percent in the first quarter 2004.  South Africa's 
 real GDP has now expanded for 23 consecutive 
 quarters, fueled mainly by a 13 percent increase in 
 gross domestic expenditures (GDE) and significantly 
 higher than the 2004 Q1's increase of 2.9 percent.  A 
 13.6 percent increase in inventories, compared to 
 first quarter's rise of 3.1 percent, explains the 
 much higher increase in GDE during the second 
 quarter.   Domestic demand (excluding inventories) 
 remained strong, increasing 5.3 percent, as interest 
 rates continued their downward trend.  Real household 
 consumption continues to grow higher than GDP, at 4.3 
 percent compared to last quarter's 4.9 percent.  Real 
 capital formation increased 10.4 percent after first 
 quarter's growth of 14.6 percent.  Capital formation 
 by public corporations contributed 59 percent of the 
 second quarter's change, while private investment 
 accounted for 39 percent. Increased global growth 
 countered the trade-weighted rand strength resulting 
 in a 42.3 percent quarterly export growth; however, a 
 95.5 percent import growth caused the current account 
 deficit to reach 3.8 percent of GDP. 
 
 ¶4.  Real household consumption increased by 4.3 
 percent in the second quarter, slightly lower than 
 4.9 percent in Q1.  Growth in household spending on 
 durable goods reflected a slowdown in Q2 growth of 9 
 percent compared to Q1 growth of 12 percent. 
 Furniture and household appliances experienced the 
 sharpest slowdown in Q2 growth.  Growth in real 
 disposable income slowed to 3.8 percent growth in the 
 second quarter, compared to the first quarter's 5 
 percent growth.  Household debt as a percent of 
 disposable income rose slightly to 54.8 percent 
 (compared to 54 percent last quarter), as consumer 
 spending on durable goods was financed by less 
 expensive credit.   Government consumption rose by 
 3.8 percent in the second quarter, lower than first 
 quarter's 4.6 percent growth. 
 
 ¶5.  During Q2, fixed capital formation grew by 10.4 
 percent, led by a 53.8 percent increase in public 
 corporation investment that accounted for 59 percent 
 of the quarterly change.  Private sector investment 
 also showed strong growth, increasing by 5.4 percent, 
 led by mining (especially platinum), agricultural and 
 manufacturing sectors.  Inventories showed especially 
 strong growth in the second quarter rising to 13.6 
 percent compared to first quarter's 3.1 percent 
 growth, with most of the inventory growth occurring 
 in the manufacturing sector. 
 
 SECOND QUARTER TRADE BALANCE TURNS NEGATIVE 
 ------------------------------------------- 
 
 ¶6.  After 22 years of consecutive quarterly trade 
 surpluses, South Africa's trade balance reached a 
 R5.5 billion deficit.  (Note: trade balance defined 
 as merchandise exports plus net gold exports minus 
 merchandise imports Endnote)  The current account 
 deficit (trade balance adjusted for net service, 
 income, and current transfer payments) widened to 
 R49.3 billion, reaching 3.8 percent of GDP.  However, 
 if imports of oil, aircraft and naval ships were 
 excluded, then the current account deficit would be 
 closer to 1 percent of GDP.  The net inward flow of 
 capital continued in the second quarter with R25.9 
 billion, primarily due to large increases in 
 portfolio investment.  Inflows of foreign direct 
 investment, which had been small but positive since 
 last year, declined in the second quarter to a 
 deficit of R1.8 billion compared to first quarter's 
 surplus of R7.8 billion.  The drop in foreign direct 
 investment was due to the sale of half of its Telkom 
 shares by foreign equity partner Thintana in June. 
 
 EXPORTS IMPROVE BUT IMPORTS OVERWHELM 
 ------------------------------------- 
 
 ¶7.  As global growth recovered in the first half of 
 2004, the export sector grew 42.3 percent (q/q) after 
 two consecutive quarters of over 9 percent declines. 
 However a 95.3 percent quarterly growth in imports 
 restrained overall GDP growth.  Second quarter real 
 merchandise exports increased 12.6 percent compared 
 to a 3.6 percent decline during the first quarter. 
 However a 20.5 percent increase in real merchandise 
 imports, due to sharp increases in oil and military 
 equipment, explains the turnaround in the current 
 account trade balance.  Between March 31 and June 20 
 2004, the weighted average rand exchange rate, 
 calculated with reference to a basket of 13 
 currencies, appreciated 2.4 percent, compared to 5.7 
 appreciation between December 31 2003 and March 31 
 2004, and 11 percent appreciation over the first 
 quarter of 2003. The South African Reserve Bank 
 continues to build foreign reserves, hoping to reduce 
 volatility in the rand exchange rate.  The country's 
 net international reserves rose by R12.1 billion 
 during Q2, following an increase of R13.4 billion in 
 Q1.  The SARB's foreign reserves increased from USD 
 9.8 billion at the end of March to USD 11.9 at the 
 end of August. 
 
 INFLATION AND MONEY SUPPLY ON COURSE 
 ------------------------------------ 
 
 ¶8.  During the second quarter, money supply (M3) 
 increased by 13.3 percent, with overall consumer 
 prices increasing by 2.3 percent.  Consumer price 
 inflation, excluding mortgage costs (CPIX), increased 
 by 5.4 percent, within the Reserve Bank's target 
 range of 3 to 6 percent.  Falling import prices 
 caused by the strong rand was the main reason for 
 consumer prices tracking downwards. Unit labor costs 
 increased 5.9 percent (q/q) just within the inflation 
 target.  Both average nominal and real wages 
 increased (9.4 percent and 5.1 percent respectively). 
 Labor productivity increased 3.3 percent. 
 
 COMMENT 
 ------- 
 
 ¶9.  Strong growth in both domestic investment and 
 consumption has improved short-term South African 
 growth.  Rising global demand is fueling growth in 
 manufacturing and mining but the expansion of those 
 sectors will have to rely on continued global growth 
 in order to overcome the negative impact of a strong 
 rand.  The latest government forecast for growth is 
 2.9 percent in 2004 and rising to 3.6 percent in 2005 
 (note: Budget Review 2004).  The 2004 Medium Term 
 Policy Statement to be presented to Parliament at the 
 end of October will probably revise government 
 economic growth forecasts.  While most private 
 economic forecasters expect 2004 growth at 3 percent, 
 the recent Quarterly Bulletin may point to some 
 problems in achieving future growth over 3 percent 
 during the next two quarters.  Both investment and 
 consumption show over 4 percent growth in the second 
 quarter, though their growth has stabilized.  In 
 order to sustain higher GDP growth, South African 
 exports should increase in the face of higher world 
 global demand growth.  South Africa has to rely on 
 strong commodity prices and global demand so that 
 exports can be the future engine of growth.  Recent 
 improvements in labor productivity can be attributed 
 to a 1.7 percent decline in employment, not the best 
 way to increase domestic demand.  Second quarter 
 foreign direct investment outflows will not help in 
 attaining the government's stated foreign direct 
 investment inflows of 2 percent of GDP. 
 Deteriorating current account deficits may put 
 pressure on the rand to depreciate; combined with 
 higher oil prices this may lead to higher inflation 
 and possibly interest rate increases.  Inflation 
 prospects for 2004 will depend on food prices, wage 
 negotiations, oil prices and the rand.  The impact on 
 targeted inflation will steer the South African 
 Reserve Bank's actions in setting interest rates. 
 End comment. 
 
FRAZER