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UNCLAS SECTION 01 OF 03 PRETORIA 000176 
 
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 
           January 14 2005 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: 
 -  November Manufacturing Production Down; 
 -  Stats SA Chief Complains About Global Data; 
 -  Reserve Bank Slows Forex Reserve Buildup; 
 -  World Bank Plans to Increase Spending in South Africa; 
 -  Moody's Upgrades SA Foreign Currency Debt; and 
 -  Vehicle Sales Increase by 17.6 percent. 
 End Summary. 
 
 NOVEMBER MANUFACTURING PRODUCTION DOWN 
 -------------------------------------- 
 
 ¶2.  November's monthly production growth declined 1.2 
 percent compared to October's monthly decline of 0.8 
 percent as the strong rand continues to impact negatively 
 manufacturing production.  This is the second consecutive 
 monthly decline in manufacturing production since the 
 manufacturing sector's recovery beginning March 2004. 
 From April 2003 until February 2004, manufacturing 
 production showed consecutive monthly declines and 
 economists expected the sector to show strong positive 
 growth later in 2004.  Growth was anticipated due to lower 
 finance costs as a result of declining interest rates from 
 mid-June 2003 through August 2004.  However, the rand has 
 continued to appreciate, putting pressure on manufactured 
 exports.  Manufacturing production still shows positive 
 growth if measured on an annual basis.  Year-on-year 
 manufacturing production grew 5.6 percent in November, 
 still indicating positive though declining growth since 
 August's peak growth at 7 percent.  The food, textile and 
 petroleum and plastics sectors contributed the most to 
 November's slowdown in growth, although the communications 
 sector showed the largest decline at 2.7 percent over the 
 preceding three months.  Source:  Stats SA Statistical 
 Release P3041.2 Revised, January 12. 
 
 ¶3.  Comment.  On January 11, Stats SA initially released 
 manufacturing production and sales data, showing 
 manufacturing production declining by 5.1 percent m/m and 
 increasing 1.9 percent on a yearly basis.  The 5.1 percent 
 decline in production would have been the largest monthly 
 decline in four and a half years if true.   Wednesday's 
 morning papers (January 12) heralded the impact of the 
 strong rand and declining economic growth of trading 
 partners leading to increased speculation of a possible 
 interest rate reduction during the next Monetary Policy 
 Committee meeting in February.  The initial manufacturing 
 data included errors, however, in the basic iron and 
 steel, non-ferrous metal products, metal products and 
 machinery sector, which has a 22.4 percent weight in the 
 production volume index.  At first, Stats SA reported that 
 this sector showed a 15 percent monthly decline; revised 
 figures now show a 2 percent increase in November growth. 
 This means that the overall manufacturing index is now 
 111.1 in October and 109.8 in November after seasonal 
 adjustment compared with the previous October and November 
 indices of 111.7 and 106.0, respectively.  End comment. 
 
 STATS SA CHIEF COMPLAINS ABOUT GLOBAL DATA 
 ------------------------------------------ 
 
 ¶4.  Pali Lehohla, Statistician-General of Statistics South 
 Africa (Stats SA), criticized international agencies and 
 global organizations that use "distorted statistics to 
 misrepresent South Africa to foreign investors."  He plans 
 to present his concerns to the UN Statistics Commission in 
 March and expects his concerns to be formally debated by 
 the UN next year.  Lehohla complains that these 
 organizations do not use official South African 
 statistics, quoting the unemployment rate, life 
 expectancy, estimated population and HIV/AIDS prevalence 
 figures as examples of "misleading statistics."  According 
 to Lehohla, the official unemployment rate is 28 percent, 
 instead of 40 percent often used; the South African 
 population should be 46.6 million compared to 45.2 billion 
 estimated by the UN.  He also said that recent estimates 
 of daily HIV/AIDS deaths in South Africa being between 600 
 and 1,000 were overestimated.  Stats SA plans to release a 
 report about the cause of death in South Africa, which 
 will be another source of data used to estimate HIV/AIDS 
 deaths.  Source:  Business Day, January 12. 
 
 ¶5.  Comment.  Recent international comparisons show little 
 improvement in South Africa's economic and social 
 standing.  The latest United Nations Human Development 
 Index (HDI) ranked South Africa 119 out of 177 countries, 
 compared to 2002's position at 107.  The impact of lower 
 life expectancy was the largest factor in the South 
 African decline in HDI.  Recently, the Heritage Foundation 
 released its index of economic freedom at 2.78, showing 
 little improvement from the previous year's value of 2.79. 
 The analysis cites unemployment rates over 40 percent, HIV 
 infection rates of 11 percent, over-regulation, regional 
 instability and high crime rates as reasons for little 
 improvement in its economic freedom indicator.  Stats SA 
 publishes both a broad and narrow indicator of 
 unemployment, with discouraged workers included in the 
 broad measure.  The latest South African unemployment 
 rates (published September 2004, using data from March) 
 are 27.8 percent for the narrow definition (including 
 people who have actively looked for work within 4 weeks of 
 the semi-annual Labor Force Survey interview), and 41.2 
 percent unemployed using the broad definition.  Stats SA 
 views mortality, HIV-prevalence and total fertility rates 
 used by international organizations to be misleading as 
 well.  Official figures released by Stats SA put life 
 expectancy for 2004 at 50 years for males and 53 for 
 females, while UN studies typically use 45.1 years for 
 males and 50.7 years for females.  Stats SA estimates HIV 
 prevalence rates are 6.5 percent lower than UN estimates. 
 The UN uses total fertility rates of 2.6, lower than the 
 total fertility rate of 2.77 in 2004 used by Stats SA, 
 primarily due to different fertility assumptions about HIV- 
 positive women, different life expectancies at birth and 
 mortality rates.  End comment. 
 
 RESERVE BANK SLOWS FOREX RESERVE BUILDUP 
 ---------------------------------------- 
 
 ¶6.  December foreign exchange purchases halved, as 
 liquidity in the market is typically low over the holiday 
 season.  Figures released by the South African Reserve 
 Bank (SARB) show it purchased $532 million of foreign 
 exchange last month, down from $1.3 billion in November. 
 Gross reserves increased to $14.9 billion.  Net reserves, 
 also called the international liquidity position, 
 increased to $11.4 billion last month, up from $11 billion 
 in November.  Economists said the SARB probably reduced 
 its activity in the foreign exchange market last month to 
 avoid distorting movements in the currency when liquidity 
 in the market was low.   Foreign exchange markets are 
 expected to remain illiquid for most of January, and given 
 the recent volatility in the rand, the SARB was likely to 
 limit its foreign exchange purchases this month as well. 
 Nedcor bank noted that gross reserves were now the 
 equivalent of three and-a-half months of import cover. 
 The rapid increase in imports as a result of the strong 
 rand and buoyant consumer demand was putting pressure on 
 the SARB to build up reserves.  According to Econometrix 
 Treasury Management analyst George Glynos, the SARB should 
 be aiming for an equivalent of between four and five 
 months' import cover.  The SARB has been steadily building 
 up its gross reserves after eliminating its foreign 
 exchange debt in February last year, when gross reserves 
 stood at about $8 billion.  However, the SARB has resisted 
 calls from exporters and labor unions to buy dollars more 
 aggressively in the market to limit the rand's strength. 
 Source:  Business Day, January 10. 
 
 WORLD BANK PLANS TO INCREASE SPENDING IN SOUTH AFRICA 
 --------------------------------------------- --------- 
 
 ¶7.   The World Bank's private sector lending subsidiary, 
 the International Finance Corporation (IFC), will increase 
 its annual spending in South Africa to between $50 million 
 and $150 million in support of black economic empowerment 
 (BEE) and small and medium-sized enterprises, according to 
 Managing Director Peter Woicke.  With total investment of 
 $225 million, South Africa is the IFC's largest client in 
 sub-Saharan Africa.   At present, the organization invests 
 roughly $40 million a year in the country.  IFC plans to 
 increase its funding for BEE deals this year, especially 
 in the mining and financial services sectors because the 
 two sectors had finalized empowerment charters.  Woicke, 
 who is also the Executive Vice-President of the IFC, is in 
 the country to meet government officials, local companies 
 and the bank's clients.  Woicke said he was concerned that 
 few black people were benefiting from the country's BEE 
 policy and urged the beneficiaries to re-invest their 
 wealth to develop the local economy.  Nearly three- 
 quarters of the R28 billion ($4.6 billion, using 6 rands 
 per dollar) BEE deals concluded in 2003 involved at least 
 one of the top six BEE consortiums:  African Rainbow 
 Minerals, Mvelaphanda Resources, Shanduka (formerly MCI 
 Resources), Safika, Kagiso and Tiso.  Last year, the IFC 
 helped the Johannesburg metropolitan council issue a R1 
 billion bond by providing a $30 million guarantee on the 
 bond.  The IFC also pumped $28 million into empowerment 
 group Mvelaphanda Resources.  Source:  Business Report, 
 January 11. 
 
 MOODY'S UPGRADES SA FOREIGN CURRENCY DEBT 
 ----------------------------------------- 
 
 ¶8.  International ratings agency Moody's Investors Service 
 has upgraded South Africa's country ceilings for foreign 
 currency debt and bank deposits to Baa1 from Baa2, 
 principally reflecting the substantial strengthening of 
 the country's foreign reserves position.  The outlook is 
 stable.  The upgrades conclude a rating review that began 
 in October.  Moody's affirmed the government's A2 domestic 
 currency debt rating, also with a stable outlook. This 
 rating had not been placed on review because the country's 
 public finance indicators were considered appropriate to 
 the existing rating.  Moody's said that the upgrades were 
 based largely on substantial improvements in official 
 external liquidity, since foreign debt levels were already 
 moderate and broadly consistent with higher-rated nations. 
 South Africa had been an exception to other Baa-rated 
 countries, with manageable external debt but relatively 
 low reserves.  Low reserves had contributed to financial 
 and exchange rate volatility in recent years, and were an 
 important explanation for the wide, three-notch difference 
 between the government's domestic and foreign-currency 
 ratings.  The gap has now been narrowed to two notches. 
 The rating agency also pointed to several other factors 
 that supported the upgrades, among them the faster growth 
 now underway and heightened investor optimism about the 
 country's future prospects.  Moody's noted that the 
 recently quicker pace of growth helped to boost imports 
 and push the trade balance into deficit in spite of the 
 commodity cycle upturn.  As a consequence, the current 
 account shortfall is likely to continue to grow, 
 particularly with a strong rand impeding the 
 competitiveness of manufacturing exports.  Capital inflows 
 covered the country's external financing needs, even 
 allowing for a substantial buildup in reserves.  Moody's 
 concludes that these inflows are vulnerable to reversal in 
 the event of various changes in global or local 
 circumstances.  However, Moody's also emphasized that 
 South Africa faces formidable long-term challenges related 
 to chronic poverty and unemployment, whose grip has become 
 more intractable with the spread of HIV/AIDS.  These 
 problems are being addressed gradually, with skills 
 training, education budgets, targeted government spending, 
 national health insurance, and hopefully, black economic 
 empowerment initiatives that will benefit the broader 
 population.  Source:  I-Net Bridge and Business Day, 
 January 12. 
 
 VEHICLE SALES INCREASE BY 17.6 PERCENT 
 -------------------------------------- 
 
 ¶9.  According to data released by Stats SA, South African 
 vehicle sales for the first ten months of 2004 increased 
 by 17.6 percent compared with the first ten months of 
 ¶2003.  Showing accelerating sales growth later in the 
 year, growth during the three months to October 2004 was 
 23.1 percent compared with the three months up to October 
 ¶2003.  Recent monthly data released by the National 
 Automobile Association of South Africa (NAAMSA) show new 
 vehicle sales increasing 37.9 percent (y/y) in December. 
 For the year as a whole, NAAMSA-reported sales improved by 
 22 percent, reflecting increased consumer spending in 
 ¶2004.  Source:  I-Net Bridge, January 12. 
 
 MILOVANOVIC