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 000270 
 
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 21 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: 
 -  Free Electricity to Poor More Expensive than Planned; 
 -  Jo'burg Needs R800 Million to Invest in Electricity 
 Infrastructure; 
 -  Amnesty Program Increases Declared Offshore Assets to R65 
 Billion; 
 -  Manufacturing Index Improves in December; 
 -  Exports to U.S. Reflect Rising Commodity Prices Rather 
 than Increase in Manufacturing Products; 
 -  Reserve Bank Expects Further Upgrades in Credit 
 Ratings; 
 -  Retail Sales to Grow 8.5 Percent in 2005; and 
 -  Banks Increase Mortgage Lending by 23 Percent. 
 End Summary. 
 
 FREE ELECTRICITY TO POOR MORE EXPENSIVE THAN PLANNED 
 --------------------------------------------- ------- 
 
 ¶2.  Government's policy of providing free basic 
 electricity for the poor has been lauded as one of the 
 successes of the fight against poverty, but service 
 delivery and administrative problems will be discussed 
 during a cabinet lekgotla (roundtable), convening in 
 Gauteng for the next three days.  These problems could 
 become issues in local government elections this year. 
 Ompi Aphane, Chief Director in the Minerals and Energy 
 Department, reported that only 12 percent of the poor had 
 received the free electricity benefit in the 18 months 
 since its launch, while expenditure on the initiative had 
 increased to about R750 million ($125 million using 6 
 rands per dollar), more than 2.4 times the amount 
 initially budgeted.  He noted that the constitutional 
 autonomy of local government meant that the national 
 government could not force the implementation of its 
 policies on other spheres of government.  According to 
 Aphane, municipalities having 1.3 million poor were 
 distributing electricity to 3 million consumers, giving 
 free electricity to 1.7 million consumers or 88 percent of 
 all municipal customers, most of whom who did not qualify. 
 Providing free electricity to the poor started began 18 
 months ago, with R300 million ($40 million, using R7.56 
 per dollar, the 2003 annual exchange rate average) 
 allocated to municipalities in the form of a conditional 
 grant from national government for the first financial 
 year, and R500 million ($60 million, using 6 rands per 
 dollar) in FY2004. In the first year, municipalities spent 
 R710 million ($94 million, using the 2003 exchange rate) 
 on the program, making up the difference from other 
 provincial sources of income. Eskom, the power company 
 responsible for rural areas and the bulk of the poor, had 
 spent only R46 million last year.  Aphane said the main 
 problem was poor targeting and leakages, with many 
 relative well-off households receiving it, while the 
 majority of the poor did not.  Many municipalities also 
 did not have the capacity to implement the program. 
 Disputes between municipalities and Eskom also created 
 problems.  Of South Africa's 284 municipalities, 57 had 
 not signed funding and service agreements with Eskom for 
 it to provide free basic electricity. These agreements 
 were necessary because Eskom was not constitutionally 
 mandated to provide electricity in municipal areas.  Two 
 municipalities disagreed with the free basic electricity 
 program and refused to implement it.  Source:  Business 
 Day, January 19. 
 
 JO'BURG NEEDS R800 MILLION TO INVEST IN ELECTRICITY 
 INFRASTRUCTURE 
 --------------------------------------------- ------ 
 
 ¶3.  Throughout the past year, Johannesburg has experienced 
 increasing power blackouts, negatively affecting 
 businesses.  Talks between the Department of Minerals and 
 Energy (DME), National Treasury, and the Provincial and 
 Local Government Department, were taking place to invest 
 R800 million ($133 million) in Johannesburg's outdated 
 electricity infrastructure.   Representatives from DME 
 cautioned that there were many competing claims on the 
 national budget and that the project would have to be 
 evaluated alongside other priorities.  Power failures in 
 the country's industrial heartland were a source of great 
 concern to government because of their economic effect and 
 threat to investment.   A department study found that 
 Johannesburg would need R2 billion over five years, but a 
 minimum R800 million investment would get the electricity 
 network to the right level.  If the government wanted to 
 update the electricity infrastructure in all of the large 
 metropolitan areas, it would cost R3-4 billion. 
 Johannesburg's problem was the most serious as its network 
 was very old and supplied major industries.  According to 
 Ompi Aphane, Chief Director in the DME, a percentage of 
 the electricity tariff paid by consumers should have been 
 used for maintenance, but municipalities used this money 
 for their other services instead.  The municipalities 
 claimed that the money allocated them by national 
 government each year from the national budget was not 
 enough for them to perform their functions.  A capital 
 grant is required, as tariff-generated investment income 
 would take too long to accrue.  Source:  Business Day, 
 January 19. 
 
 AMNESTY PROGRAM INCREASES DECLARED OFFSHORE ASSETS TO R65 
 BILLION 
 --------------------------------------------- ------------ 
 
 ¶4.  Applicants for the foreign exchange and tax amnesty 
 declared R65 billion in offshore assets, according to the 
 Department of Treasury's amnesty unit.  This figure far 
 exceeds the initial expected increase in offshore assets 
 of R35-40 billion.  Amnesty unit spokesman Jannie Rossouw 
 said the R65 billion was calculated at the exchange rates 
 prevailing on February 28, 2003 (about R8 to the dollar) 
 and an additional R2.2 billion in tax revenue should come 
 from amnesty applicants.  About 80 percent of this sum 
 would be come from foreign assets remaining offshore, 10 
 percent from funds repatriated and 10 percent as a tax 
 levy.  In terms of the amnesty law, a 5 percent tax would 
 have to be paid on assets repatriated to South Africa and 
 a 10 percent levy on assets that would continue to be held 
 offshore.  Altogether about 42,000 applications were 
 received, 23,000 of which have been processed.  Rossouw 
 said the adjudication process had taken longer than 
 expected because of the flood of about 23,000 applications 
 in the last few days before the deadline at the end of 
 February last year.  The influx meant a unit initially 
 comprising only nine adjudicators and some support staff 
 had to be increased to more than 70 people, 36 of them 
 adjudicators.   Another reason for the delay was that 
 applications received close to the deadline were generally 
 more complex than earlier ones and lacked all the 
 necessary information.  The adjudication process is 
 expected to be to be completed by midyear. Those granted 
 amnesty would have six months to pay their taxes.  Source: 
 Business Day, January 19. 
 
 MANUFACTURING INDEX IMPROVES IN DECEMBER 
 ---------------------------------------- 
 
 ¶5.  According to the latest Investec Purchasing Managers 
 Index, manufacturing showed signs of improving in 
 December, but there are indications that weaker export 
 demand and a continuing strong rand may affect future 
 growth.   The index, which measures aspects of 
 manufacturing including orders, output and employment, 
 increased to a seasonally adjusted 53.2 points in 
 December, up from 51.6 in November.  The higher index 
 reading last month followed two successive months of 
 decline.  The improvement came mainly from a build-up of 
 inventories and an improvement in suppliers' performance. 
 However, measures of new sales orders and business 
 activity fell slightly, reflecting the effect of the 
 strong rand on production.  Investec Asset Management head 
 of fixed income Andre Roux said yesterday that the 
 slowdown in export growth (exports account for 16 percent 
 of South Africa's economy) and increased import 
 competition were the main reasons for lower manufacturing 
 sales.  Last week, Statistics SA's manufacturing 
 production showed a monthly November decline of 1.2 
 percent compared to October's monthly decline of 0.7 
 percent, while the rand strengthened more than 11 percent 
 against the dollar over the two months.  Roux expected 
 manufacturing activity to grow about 4 percent in 2005, 
 compared with about 5.5 percent last year.  Pieter 
 Laubscher, a senior economist at the University of 
 Stellenbosch's Bureau for Economic Research, said 
 yesterday that a crucial determinant of manufacturing 
 growth this year would be the rand.  Source:  Business 
 Day, January 18. 
 
 EXPORTS TO U.S. REFLECT RISING COMMODITY PRICES RATHER 
 THAN INCREASE IN MANUFACTURING PRODUCTS 
 --------------------------------------------- --------- 
 
 ¶6.  South African Chamber of Business (SACOB) points out 
 that November's increase of $526.6 million compared to 
 November 2003 in South African exports to the United 
 States was primarily due to increased value of precious 
 metals and iron and steel products exports, as 
 international metal prices rose substantially over the 
 past year.  Total exports of $5.34 billion to the U.S. for 
 the first 11 months of 2004 exceeded total exports to the 
 U.S. of $4.88 billion for the whole of 2003.  In November, 
 precious metals and stones grew 61.6 percent year on year 
 to $212.5 million and iron and steel products increased 
 333.5 percent to $90 million.  For the year to date, 
 precious metals and stones exports increased 29.2 percent 
 to $2.35 billion, and iron and steel products grew 119 
 percent to $645 million.   Many manufactured exports to 
 the United States show sluggish growth.  Vehicle exports 
 fell 14 percent to $40 million year on year in November 
 and declined 23.2 percent to $530.3 million for the year 
 to date.  Machinery and mechanical exports showed growth 
 of 8.6 percent to $189.2 million, while clothing declined 
 47.1 percent to $70.8 million for the year to date. 
 Despite the strength of the rand making imports cheaper, 
 the value of imports from the U.S. dropped 17 percent when 
 compared with November 2003.  According to SACOB, South 
 Africa had a trade surplus with the United States of $2.45 
 billion ending in November.  SACOB compiled tariff and 
 trade data from the U.S. Commerce Department, U.S. 
 Treasury and U.S. International Trade Commission.  The 
 U.S. has not released year-end trade figures yet.  Source: 
 Business Day, January 19. 
 
 ¶7.  Comment.  Over the past three years, over 30 percent 
 of South African exports went to Europe, of which the 
 United Kingdom had the largest share at 8.4 percent in 
 both 2001 and 2002 and 8.8 percent in 2003.  The 
 importance of the U.S. market for South African exports 
 has increased; its share for 1995, 2001, 2002 and 2003 was 
 4.7, 7.9, 8.1 and 10.5 percent, respectively, 
 demonstrating the impact of AGOA.  U.S. share of South 
 African exports is now greater than the U.K. share. 
 Historically, the United Kingdom was South Africa's major 
 trading partner, although the United Kingdom provided over 
 60 percent of South African foreign direct investment in 
 2003 and 38 percent of all foreign investment.  End 
 comment. 
 
 RESERVE BANK EXPECTS FURTHER UPGRADES IN CREDIT RATINGS 
 --------------------------------------------- ---------- 
 
 ¶8.   South Africa's continued build-up of foreign exchange 
 reserves might help the country achieve further credit 
 rating upgrades, according to Daniel Mminele, the head of 
 the Financial Markets Department of the South African 
 Reserve Bank.  On January 12, Moody's, an international 
 credit ratings company, upgraded South African debt to 
 Baa1 from Baa2, citing increased foreign currency reserves 
 as one reason.  The upgrade, the first by Moody's since 
 November 2001, puts South Africa on the same level as 
 Thailand and Mexico, and one notch below Malaysia. 
 "Further improvements in foreign exchange reserves levels, 
 together with progress being achieved with regard to some 
 of the other challenges highlighted by Moody's, should 
 certainly support the case for another move, not only by 
 Moody's but by other leading ratings agencies as well," 
 Mminele said.  Moody's said South Africa must also tackle 
 poverty, unemployment and the HIV/AIDS epidemic, where the 
 government's response had been "frustratingly inadequate." 
 Standard & Poor's, another credit rating firm, said 
 progress on these issues was required before it increased 
 its own rating, which is one notch below Moody's.  Source: 
 Business Report, January 19. 
 
 RETAIL SALES TO GROW 8.5 PERCENT IN 2005 
 ---------------------------------------- 
 
 ¶9.  The Bureau for Market Research (BMR) expects retail 
 sales to grow 8.5 percent in 2005 with sales expected to 
 reach R350 billion ($58 billion), benefiting from low 
 interest rates and inflation.  Sales of semi-durable goods 
 such as clothes and footwear are predicted to grow 10 
 percent, while growth in non-durable such as food and 
 beverages, and durable items such as refrigerators and 
 cars, are expected to vary between 7 percent and 8 
 percent, respectively.  According to BMR, it takes 18 to 
 24 months for interest rate cuts to have an effect on 
 retail sales.  The two other factors leading to high 
 growth in the retail sector are the relatively low 
 inflation and the emerging black middle class, which 
 benefit the clothing, footwear, food, motor vehicle and 
 insurance sectors.  Recent data released by Statistics SA 
 showed that annual nominal retail sales grew by 16.7 
 percent (y/y) in October 2004.  The figures bring the 
 total for the first 10 months of 2004 to R252 billion, 
 13.2 percent higher than the R223 billion in the 
 corresponding period in 2003.  Source:  Business Report, 
 January 19. 
 
 BANKS INCREASE MORTGAGE LENDING BY 23 PERCENT 
 --------------------------------------------- 
 
 ¶10.  South African banks boosted mortgage lending by 23 
 percent in the year through November as the lowest 
 interest rates in more than two decades made debt cheaper. 
 The total value of mortgage loans granted by South African 
 banks rose to R396.9 billion from R322.4 billion a year 
 earlier, according to data from the South African Reserve 
 Bank.  Standard Bank, Africa's largest bank by assets, 
 lent R102.1 billion in home loans during the year, an 
 increase of 40 percent. FirstRand, the owner of the second- 
 largest South African bank, lent R61.1 billion, a gain of 
 22 percent, while Nedcor's Nedbank, the third-ranked bank, 
 increased home loans by 11 percent.  Home loan lending by 
 ABSA Group, the nation's fourth-ranked bank, rose 24 
 percent to R122.4 billion.  Source:  Business Report, 
 January 19. 
 
 MILOVANOVIC