This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 PRETORIA 004686 
 
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 AFRICA ECONOMIC NEWSLETTER 
           OCTOBER 22, 2004 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: 
 -  Third Quarter FDI Improves but Still Low; 
 -  November GDP Revisions May Boost Growth; 
 -  Fitch Upgrades Ratings to Stable; 
 -  Moody's Ratings Agency Considers South African Upgrade; 
 -  Improvement but Poverty Still High; 
 -  Study Reveals Negative Employment Trends; 
 -  Leading Economic Indicator Rises; 
 -  South Africa's Poor Are Saving; and 
 -  Economy Should Attract Increased Investment.  End 
 Summary. 
 
 THIRD QUARTER FDI IMPROVES BUT STILL LOW 
 ---------------------------------------- 
 
 
 ¶2.  BusinessMap Foundation said third quarter foreign 
 direct investment (FDI) into South Africa at R27.8 billion 
 ($4.3 billion using 6.5 rands per dollar) improved over 
 second quarter's disinvestment primarily due to Barclays' 
 announced plans to obtain a majority share in ABSA bank. 
 The rise in the third quarter followed a R10.6 billion 
 disinvestment in the second quarter because of Thintana 
 consortium's announced plans to sell its R 6.1 billion 
 share in Telkom.  Subtracting the R1.8 billion of 
 disinvestment that occurred (primarily in the consumer 
 goods sector), net FDI during the third quarter was R26.1 
 billion.  In 2003, Africa attracted 2.7 percent and South 
 Africa accounted for 1 percent of total FDI in the world. 
 Quarterly FDI into South Africa is small, volatile, and 
 impacted by a few large transactions that can affect 
 quarterly and yearly averages.  Source:  Business Day, 
 October 21; BusinessMap FDI Third Quarter, October 20. 
 
 ¶3.  Comment.  BusinessMap Foundation collects foreign 
 direct investment data by using press accounts to count 
 both FDI intentions as well as actual investments.  It 
 uses the same FDI definitions as the South African Reserve 
 Bank (SARB) by including only long-term investment, and 
 cases with more than 10 percent ownership as well as 
 reinvestment activity; however, it includes intentions to 
 invest when they are announced as well as actual 
 investment.  Therefore, this method captures the 
 investment mood, but does not measure actual inflows. 
 The timing of recording streams of investment leads to the 
 primary difference in investment numbers between 
 BusinessMap and SARB.  In addition, BusinessMap's database 
 also allows aggregation by industry, unlike the SARB data. 
 End comment. 
 
 NOVEMBER GDP REVISIONS MAY BOOST GROWTH 
 --------------------------------------- 
 
 ¶4.   On November 30, Statistics SA (Stats SA) will revise 
 gross domestic product (GDP) figures upwards, after new 
 data suggested higher levels of economic activity than 
 previously stated.  GDP figures from 1998 to 2004 will be 
 revised.  GDP grew 1.9 percent in 2003, but has since 
 accelerated gradually following a recovery in the 
 manufacturing sector. The latest figures show that GDP 
 increased at an annualized rate of 3.9 percent in the 
 second quarter, the fastest growth experienced since 2002. 
 Updated every five years, the base or reference year for 
 the GDP figures will be changed from 1995 to 2000.  The 
 GDP figures will also be benchmarked, an annual process 
 that combines high-frequency data with less frequent, but 
 more accurate, data.  After making improvements to some of 
 its surveys, Stats SA found that it had underestimated the 
 size of the manufacturing sector by 17 percent, while 
 retail sales had been underestimated by 20 percent before 
 the revisions were made.   It is unlikely that the 
 underestimation of total GDP will be of the same 
 magnitude, because not all industries had increased 
 economic activity.  Source:  Business Day, October 21. 
 
 FITCH UPGRADES RATINGS TO STABLE 
 -------------------------------- 
 
 ¶5.  Fitch Ratings revised its outlook on South Africa's 
 sovereign ratings to stable from positive with the ratings 
 for its long-term foreign and local currency unchanged 
 from its March 2004 rating of BBB and A- respectively. 
 Fitch cited improvements in external liquidity, reduced 
 external debt, and improved prospects for sustaining 
 growth above 3 percent over the medium-term as primary 
 reasons for the sovereign ratings upgrade.  South Africa's 
 gross international reserves, currently $12.5 billion, 
 increased by $4 billion since February 2004.  Net external 
 debt (debt owed to foreigners less the foreign assets of 
 the banking system) is projected to fall to 5 percent of 
 GDP in 2004, compared to 17 percent in 2002.  Fitch's 
 announcement of the upgrade comes several days after 
 Moody's announcement of putting South Africa on review for 
 a possible upgrade.  Source:  I-Net Bridge, October 21; 
 Business Day, October 22. 
 MOODY RATINGS AGENCY CONSIDERS UPGRADE 
 --------------------------------------------- ------- 
 
 ¶6.  International credit ratings agency Moody's placed 
 South Africa's current Baa2 sovereign rating on review for 
 a possible upgrade, committing the agency to a decision 
 within three months.  A further incremental upgrade by 
 Moody's would place South Africa in the 'upper' investment 
 grade category of Baa1, two levels above investment grade. 
 Other international ratings agencies, such as Standard & 
 Poor's and Fitch currently rank South Africa at one level 
 above investment grade: however, Moody's has traditionally 
 been the first to upgrade.  Upgrading South Africa's 
 credit rating will put the country in a better position to 
 attract significant capital inflows, while reducing the 
 cost of borrowing in the offshore markets.  Countries such 
 as China, Malaysia and Thailand have Baa1 rankings; with 
 higher economic growth rates, they have attracted more 
 foreign direct investment (FDI).   Moody's imminent 
 upgrade of South Africa's rating is another endorsement of 
 the country's minimal reliance on foreign debt, improved 
 external liquidity position and its macroeconomic 
 policies.  Moody's cited South Africa's weak economic 
 growth relative to other emerging market countries and low 
 levels of foreign reserves as constraints to its rating. 
 Moody's did note the strong economic performance this 
 year, particularly a strong upturn in investment spending 
 and robust demand, and South Africa's improved 
 international liquidity position.  Source:  Business 
 Report, October 17. 
 
 IMPROVEMENT BUT POVERTY STILL HIGH 
 ---------------------------------- 
 
 ¶7.  Research Survey's 2004 poverty index ranking improved 
 to 39, up from 43 last year.  The poverty index ranks 
 poverty levels on a scale of 100 with 100 representing 
 extreme poverty and 0 representing complete affluence. 
 Details of the survey, conducted among a sample of 3,504 
 citizens, concentrated on a special poverty index based on 
 the provision of basic services, access to 
 telecommunications and transport, and adequacy of 
 nutrition.  Three groups fared the worst in the rankings, 
 including:  (1) those living in rural farm workers' 
 quarters at 70; (2) those living in urban squatter shacks 
 at 63; and (3) those living in rural villages at 60.  The 
 quality of life improved once people had formal dwellings. 
 People in formal houses in the former townships scored 30. 
 The survey highlighted the inequalities which exist 
 between the various population groups, with blacks living 
 in townships and informal settlements scoring an overall 
 average of 47 (improving from 51 last year), while those 
 living in mostly white suburbs scored a high ranking of 
 eight.  By province, the poorest were the Eastern Cape at 
 50 (improving from 53), Limpopo at 48 (improving from 50) 
 and Mpumalanga at 47 (improving from 56).  The wealthiest 
 live in the Western Cape and Gauteng, scoring 22 and 27 
 respectively.  One in five adult South Africans said they 
 could not afford to eat the correct foods.  This figure 
 rose to one in four people for the over 50 population, and 
 one in three for those at the bottom end of the income 
 ladder and the unemployed.  Source:  SAPA, October 18. 
 
 STUDY REVEALS NEGATIVE EMPLOYMENT TRENDS 
 ---------------------------------------- 
 
 ¶8.  The Development Policy Research unit of University of 
 Cape Town's School of Economics released an employment 
 study commissioned by the President's Office.  Its 
 findings described employment trends between 1994 and 
 ¶2002.  The South African economy created 1.6 million jobs, 
 however, the labor force increased by 5 million.  For 
 every 100 South Africans seeking employment, only 32 found 
 work of some kind.  In addition, unemployment among 
 university graduates has, proportionally, increased more 
 than in any other education sector -- with African 
 graduates hit the worst.  The study cited possible reasons 
 for high unemployment among African university graduates 
 including the perceived quality of the tertiary 
 institution that students attended, the public sector 
 restructuring with public sector being a major source of 
 black African employment, and training in fields with less 
 employment potential.  Source:  Cape Argus, October 15. 
 LEADING ECONOMIC INDICATOR RISES 
 -------------------------------- 
 
 ¶9.  South Africa's August 2004 leading economic indicator, 
 compiled by the South African Reserve Bank (SARB), 
 increased 10.7 percent (y/y) compared to July's 11 percent 
 increase.  Contributing positively to growth were average 
 manufacturing hours worked, job advertisements, 
 manufacturing orders, building plans approved, business 
 confidence, the interest rate spread between the money 
 market and capital market instruments, equity prices, and 
 real M1 money supply.  Negative factors were the 
 inventory/sales ratio, commodity prices, and the leading 
 indicator of major developed countries.  The SARB in March 
 2004 revised its leading and coincident business cycle 
 indicators, the second revision since it first published 
 business cycle indicators in 1983.  The leading indicator 
 has been pared down to 13 components from 21, while the 
 coincident indicator has been cut to 5 from 7.  The new 
 indicators are also less volatile than the old indicators, 
 while the lead time for the leading indicators has been 
 extended to 15 months from the previous 11.5 months. 
 Source:  I-Net Bridge, October 18 
 
 SOUTH AFRICA'S POOR ARE SAVING 
 ------------------------------ 
 
 ¶10.  Research by FinMark Trust, presented to the annual 
 South African Savings Institute's symposium, highlights 
 how low income households save.  The informal savings 
 industry is fairly well developed already, with burial 
 societies (where monthly payments are made to cover 
 funeral costs) and stokvels (where members deposit monthly 
 and withdraw annually) often the most popular forms of 
 community-based savings schemes.  5.6 million people in 
 the lowest income categories try to save regularly and 
 many poor people demonstrate a propensity to save. 
 However, most South Africans would prefer a bank account 
 to informal savings schemes, with confidence in bank 
 accounts fairly high, even among the poor.  Bank accounts 
 are the most popular form and the preferred method of 
 actual savings with 10.3 million out of 13.2 million 
 savers in South Africa holding bank accounts.   This 
 finding holds with people in the lowest income brackets as 
 well.  The informal and formal parts of the financial 
 services industry are interlinked.   FinMark Trust says 
 about 75 percent of stokvels have group bank accounts.  It 
 also appears that, as incomes improve, savers do not 
 abandon informal methods of savings, such as burial 
 societies and stokvels.   Ross Esson, a Cape Town 
 postgraduate student, presented research at the conference 
 showing that burial societies were the most popular forms 
 of savings among people in Cape Town's largest townships, 
 Khayelitsha and Mitchell's Plain, particularly among those 
 who earned relatively high wages.  Bank savings as a 
 proportion of total savings increased as incomes grew, but 
 stokvel savings remained relatively stable across all 
 income categories surveyed.  Females, although 41 percent 
 more likely than men to save, would tend to save less than 
 males, mainly because their income levels were lower. 
 Source:  Business Day, October 19. 
 
 ¶11.  Comment.  Historically, the major South African banks 
 have ignored servicing the low-income population.  South 
 African banks earn more from bank charges than from 
 returns of investment capital.  Servicing the 'unbanked' 
 population and increasing the savings rate are current 
 government objectives.  Approximately 30 percent of South 
 Africans (over 13 million) are without a bank account. 
 Next week, the government will announce a low-cost banking 
 initiative that should improve access to banking in all 
 geographic areas.  The new national bank account, or 
 'Mzansi' account, will be launched on October 25th by the 
 big four South African banks as well as Postbank, the 
 South African Post Office's savings institution.  The 
 Black Economic Empowerment (BEE) financial sector charter 
 drove this banking initiative.  In addition, the National 
 Treasury has recently introduced a retail bond in order to 
 encourage a savings culture among the population.  End 
 comment. 
 
 ECONOMY SHOULD ATTRACT INCREASED INVESTMENT 
 ------------------------------------------- 
 ¶12.  Increased local and foreign direct investment will 
 lead to improved growth as the benefits of inflation- 
 targeting begin to impact South Africa's economy, 
 according to Martin Jankelowitz, head of market and 
 economic research at Investment Solutions.  A virtuous 
 circle will impact the economy as rand strength, leading 
 to lower inflation, facilitated by declining nominal 
 interest rates, will provide strong returns on local 
 assets and expanding business opportunities.  Spending by 
 consumers, the primary beneficiaries of the low inflation, 
 low interest-rate environment, has increased by over 4 
 percent during the last three quarters.  Private fixed 
 investment increased by 5.4 percent, supporting the view 
 that the benefits of inflation targeting are starting to 
 be felt.  The South African Investec PMI, essentially a 
 manufacturing activity index, indicates that manufacturing 
 is expanding at its fastest pace in almost two years, with 
 all the underlying sub-indices strong, notably business 
 activity and new sales orders.  Significantly, the 
 Employment Index has remained above 50 (indicating 
 expansion) for six consecutive months. With business 
 confidence indicators at a record high, expectations 
 remain optimistic.  Source:  I-Net Bridge, October 20.