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UNCLAS SECTION 01 OF 04 PRETORIA 005158 
 
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 
          NOVEMBER 26, 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: 
 -  October Consumer Prices Slightly Higher than Market 
 Expectations; 
 -  Producer Prices Show Mild Gain; 
 -  BER Expects SA Growth to Exceed 4 Percent in 2005; 
 -  Limpopo Study Aims to Increase Food Production; 
 -  Leading Economic Indicator up 9.3 Percent; 
 -  Erwin Clarifies Listing of New State IPOs; 
 -  Interest Rate Reduction More Likely in Early 2005; 
 -  Signs of Strong Domestic Investment; and 
 -  Over Half of South Africans are Living in Poverty. 
 End Summary. 
 
 OCTOBER CONSUMER PRICES SLIGHTLY HIGHER THAN MARKET 
 EXPECTATIONS 
 --------------------------------------------- ------- 
 
 ¶2.  In October, targeted inflation (CPIX, consumer prices 
 excluding mortgage costs) increased by 4.2 percent (y/y), 
 slightly higher than the 4.1 percent growth Reuter's 
 market consensus forecast.  October's overall consumer 
 prices increased by 2.4 percent (y/y) compared to 
 September's growth of 1.3 percent.  Higher food, fuel and 
 power and transport prices were why October's CPIX 
 inflation was higher than September's 3.7 percent.  Rising 
 meat, fruit and vegetable prices pushed up food costs in 
 October and food prices are expected to rise as a result 
 of adverse weather conditions (drought has lasted over two 
 years) and rising global food prices.  Source:  Standard 
 Bank, CPI Alert, November 24; Business Day, November 25. 
 
 PRODUCER PRICES SHOW MILD GAIN 
 ------------------------------ 
 
 ¶3.  October producer prices increased 1.9 percent (y/y), 
 slightly higher than market expectations of 1.8 percent 
 and an increase of 0.5 percentage points over September's 
 producer price inflation.  Domestic producer prices 
 increased 2.7 percent while imported producer prices 
 showed a 0.3 percent decline.  In October, the sharp 
 increase in oil prices contributed 0.6 percent to the 
 month/month increase in producer price inflation, with oil 
 price contribution strong in plastics, chemicals and 
 petroleum products.  Increases in oil prices in the 
 domestic economy should be lower in November as the rand 
 remains strong and the global oil prices have retreated 
 from recent highs.  Source:  Investec, PPI Update; 
 Standard Bank, PPI Alert, November 25; Business Day, 
 November 26. 
 
 BER EXPECTS SA GROWTH TO EXCEED 4 PERCENT IN 2005 
 --------------------------------------------- ---- 
 
 ¶4.  The University of Stellenbosch's Bureau for Economic 
 Research (BER) expects South African economic growth to 
 exceed four percent in 2005, helped by strong consumer and 
 investment demand.  Although growth should be higher than 
 this year's expected 2.9 percent, exports should show slow 
 growth next year because of the rand's strength.  BER 
 expects that growth in consumer spending would slow next 
 year to around 3.7 percent down from 4.1 percent in 2004, 
 while investment was set to increase by 9 percent next 
 year compared to 8.4 percent this year.  BER forecasts the 
 rand to weaken to around R7.50-R8 against the dollar in 
 2005, given South Africa's widening current account 
 deficit.  Economist Mike Schussler forecasts that growth 
 will rise above 4 percent over the next two years, with 
 record growth in economic activity likely to continue 
 until 2010, when South Africa hosts the Soccer World Cup. 
 Source:  Business Day and I-Net Bridge, November 19. 
 
 LIMPOPO STUDY AIMS TO INCREASE FOOD PRODUCTION 
 --------------------------------------------- - 
 
 ¶5.   Half of Africa's population will face water stress or 
 scarcity by 2025.  For the next five years, researchers 
 will study the way farmers along the Limpopo basin through 
 Zambia, Botswana, Zimbabwe, Mozambique and SA collect and 
 manage water. The $5 million World Bank-funded research 
 project will examine how the river basin could be a more 
 reliable producer of food for the 14 million people 
 surrounding the river.  According to Adriaan Louw of the 
 South African Agricultural Research Council, which is 
 coordinating the research project, about 10 percent of the 
 population was expected to abandon their homes and migrate 
 south in the next five years.  The poverty of people 
 living in the Limpopo basin makes them susceptible to 
 failures in the water supply.  In dry years, some 
 stretches of the river only see water flowing for 40 days 
 and pollution and competition for usable water can prevent 
 efficient use.  The Limpopo is one of nine river basins 
 the researchers will study.  As well as gathering 
 information about the problems, they will introduce 
 different farming methods to ensure better management of 
 soil and water.  Small farmers, who rely on seasonal rains 
 making them vulnerable to the frequent floods and 
 droughts, do much of the farming in the Limpopo basin. 
 Source:  Business Day, November 19. 
 
 LEADING ECONOMIC INDICATOR UP 9.3 PERCENT 
 ----------------------------------------- 
 
 ¶6.  South Africa's September 2004 leading economic 
 indicator rose by 9.3 percent (y/y), according to the 
 South African Reserve Bank (SARB), compared to August's 
 y/y change of 10.7 percent.  In September, four leading 
 indicator components showed slower growth and three showed 
 higher.  Interest rate spreads between the money market 
 and capital market instruments, commodity prices, and the 
 leading indicator of major developed countries contributed 
 to slower September growth while job advertisements, 
 average manufacturing hours worked, equity prices and real 
 M1 money supply growth showed higher growth.  The 
 coincident indicator is up 20.2 percent y/y in August 
 compared to 18.7 percent y/y in July. This increase 
 reflects the strong growth in domestic activity and is at 
 its highest y/y growth since 1995.  In March 2004, the 
 SARB revised its leading and coincident business cycle 
 indicators. The SARB first published business cycle 
 indicators in 1983.  These indicators were revised in 1994 
 and have now been revised again.  The leading indicator 
 has been reduced to 13 components from 21, while the 
 coincident indicator has been cut to 5 from 7.  The new 
 indicators are less volatile than the old indicator, while 
 the lead for the leading indicators has been extended to 
 15 months from the previous 11.5 months at the peak and 
 five months at the trough.  Source:  I-Net Bridge November 
 ¶22. 
 
 ERWIN CLARIFIES LISTING OF NEW STATE IPOS 
 ----------------------------------------- 
 
 ¶7.  Public Enterprises Minister Alec Erwin launched this 
 week the IPO Reference Manual, a guide for upcoming share 
 sales of state assets.  The Public Enterprises Department 
 said it viewed IPOs as one option available in the 
 restructuring of state-owned enterprises.  Erwin said 
 parastatals would need to meet conditions for listing. "An 
 IPO would be considered when the corporate structure and 
 balance sheet of the state-owned enterprise is strong, and 
 where we see the opportunity of lowering the cost of 
 capital through an IPO; however, no IPOs are envisaged 
 this financial year," he said.  He expects concessions, 
 joint ventures and public-private partnership arrangements 
 to continue in the next year.  Although government would 
 retain strategic control of power utility Eskom, national 
 carrier South African Airways and Transnet, parts of these 
 parastatals could be partially listed as their balance 
 sheets and corporate structures become stronger.  Airports 
 Company SA (ACSA), which owns and operates 10 of South 
 Africa's major airports, will be sold next year.  ACSA was 
 the first parastatal to be partially privatized when 
 Italian operator Aeroporti di Roma paid R918 million for 
 its 20 percent share in 1998.  The transport department 
 has scheduled a shareholders' meeting for December to 
 discuss the sale of shares in the company and details 
 should be announced by the end of the year. Aeroporti di 
 Roma is expected to exercise its option to buy another 10 
 percent in the company.   Government owns 76 percent of 
 ACSA, while five empowerment consortia collectively own 4 
 percent. Source:  Business Report, Business Day and I-Net 
 Bridge, November 23. 
 
 INTEREST RATE REDUCTION MORE LIKELY IN EARLY 2005 
 --------------------------------------------- ---- 
 ¶8.  The next South African Reserve Bank's Monetary Policy 
 Committee (MPC) meeting, scheduled for December 8 and 9, 
 promises to surprise either financial markets or 
 economists, reflecting divided views.  The MPC could cut 
 the repurchase rate by 50 basis points, as reflected by 
 forward rates, which are now pricing in close to a 100 
 percent probability of a 50 basis point rate cut. 
 Alternatively, the bank may leave rates unchanged.  The 
 Reuters consensus forecast indicates that most economists 
 believe this will be the outcome.  The major factor in 
 support of a rate cut is the low inflation rate, which has 
 been supported by the strong rand.  CPIX, the bank's 
 official inflation measure, reached a low of 3.7 percent 
 in October, and although it is expected to increase from 
 this level, there is consensus that it will remain within 
 the target range of 3 percent to 6 percent in the next two 
 years.  The currency broke the key R6 to the dollar level 
 this month, supported by improving South African 
 macroeconomic variables and dollar weakness.  Reuters 
 forecasts indicate that most economists believe the rand 
 will weaken steadily in the near to medium term.  If 
 currency strength persists, there is a risk the bank might 
 undershoot the inflation target. However, the bank has 
 explicitly said it would not intervene, so it seems a rate 
 cut may be the only option available to weaken the 
 currency.  Factors not supportive of another rate cut 
 include continuing strong consumer demand and high oil 
 prices.  Over the past few months there has been a retail 
 and vehicle sales point to robust consumer demand. 
 Private sector credit extension is at high levels, meaning 
 consumers are borrowing in order to spend, and this tends 
 to be inflationary.  Since consumer demand is normally 
 quite high during December, it implies that an interest 
 rate cut at this meeting would add fuel to consumer 
 spending and credit demand.  For these reasons, analysts 
 believe that the MPC will wait until early 2005 to change 
 interest rates, even with a strong currency.  Source: 
 Business Day, November 23. 
 SIGNS OF STRONG DOMESTIC INVESTMENT 
 ----------------------------------- 
 
 ¶9.  Domestic fixed investment shows signs of increasing at 
 record levels over the next several years.  The announced 
 private sector investment plans include:  R 5 billion 
 ($830 million using 6 rands per dollar) over the next five 
 years by SAB (part of SABMiller), SASOL (an oil company) 
 with capital spending at R 15 billion ($2.5 billion), PPC 
 (a cement company) spending R1 billion ($170 million); and 
 investment by vehicle manufacturers reaching a five-year 
 high of R3.5 billion ($580 million) in 2004.  Public 
 enterprise investment spending should also increase 
 briskly.  Eskom (the electricity parastatal) and Transnet 
 (transportation public enterprise) are expected to spend 
 R165 billion ($27.5 billion) improving South Africa's 
 infrastructure.  Source:  Business Day, November 23. 
 
 OVER HALF OF SOUTH AFRICANS ARE LIVING IN POVERTY 
 --------------------------------------------- ---- 
 
 ¶10.  Fifty-seven percent of South Africans are living 
 below the poverty line, according to a recent study by the 
 Human Sciences Research Council (HSRC).  Based on data 
 gathered in the 2001 census, the report said the provinces 
 with the highest proportion of poor people were Limpopo 
 (77 percent) and Eastern Cape (72 percent). Western Cape 
 and Gauteng had the fewest proportion of poor with 32 
 percent and 42 percent, respectively. 
 The poverty gap, which is the amount it would take to 
 bring the income of the poor up to the poverty line, 
 increased from R56 billion in 1996 to R81 billion 
 currently.  KwaZulu-Natal, at R18 billion, has the largest 
 poverty gap, followed by Eastern Cape and Gauteng. 
 Gauteng's poverty gap grew faster than other provinces 
 because the area's population has grown faster than its 
 economy.  The poorest municipality was Ntabankulu in the 
 Eastern Cape where 85 percent of people lived below the 
 poverty line.  Municipalities with the lowest poverty 
 rates included Stellenbosch (23 percent) and Saldanha Bay 
 (25 percent) in Western Cape.  Of the large cities, Cape 
 Town had the fewest poor people at 30 percent, followed by 
 Pretoria (35 percent) and Johannesburg (38 percent). 
 Source:  Sunday Times, November 21; Allafrica.com, 
 November 23. 
 
 ¶11. Comment.  The HSRC study's poverty line is based on 
 the Bureau of Market Research's minimum living level in 
 ¶2001.  The poverty line varies according to household 
 size; the larger the household, the larger the income 
 required to keep it out of poverty.  The poverty income by 
 household size in 2001 used in this study was: 
 Household Size, Rands per Month (6 rands per $) 
 1    587 ($98) 
 2    773 ($129) 
 3    1028 ($170) 
 4    1290 ($215) 
 5    1541 ($257) 
 6    1806 ($300) 
 7    2054 ($340) 
 8+   2503 ($417) 
 End comment. 
 
 FRAZER