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 000084 
 
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 7 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: 
 -  IMF Report on South African Investment; 
 -  Government Set to Meet 3.2 Percent Budget Deficit 
 Target; 
 -  Gasoline Prices to Decline in February; 
 -  Economic Forecasts for 2005; and 
 -  Service Sector SETA Faces Funding Crisis. 
 End Summary. 
 
 IMF REPORT ON SOUTH AFRICAN INVESTMENT 
 -------------------------------------- 
 
 ¶2.  A recent study by the International Monetary Fund 
 (IMF) highlights South Africa's foreign investment profile 
 from 1994 to 2002.  South Africa has had no problem 
 attracting foreign investment, however, the type of 
 investment that it attracts is worrying from an economic 
 growth perspective.  South Africa attracts far less 
 foreign direct investment (FDI) compared to emerging peer 
 countries such as Thailand, Malaysia, Mexico, Poland and 
 South Korea.  However, South Africa surpasses other 
 emerging market economies in attracting portfolio 
 investment.  According to the IMF study, during the period 
 1994 to 2002, average net inflows of FDI into SA amounted 
 to 1.5 percent of gross domestic product (GDP), compared 
 with just 3 percent of GDP in 16 other emerging markets. 
 Excluding the large FDI transactions, such as Telkom's 
 partial privatization in 1997 and the Anglo American 
 takeover of De Beers in 2001, FDI fell to an average of 
 0.7 percent of GDP over the eight-year period.  During 
 1994 to 2002, the share of foreign investment in capital 
 flows was 88 percent in other peer countries, while the 
 FDI share amounted to only 30 percent in South Africa. 
 Although the FDI share in SA has increased to 50 percent 
 during the 2000 to 2002 period, mostly due to the slowdown 
 in equity flows, it remains well below that in other 
 emerging market countries.  Because of its long -term 
 horizon, FDI is more conducive to economic growth and job 
 creation by helping the transfer of technology and 
 improving the skill levels of the labor force.  The study 
 shows that South Africa attracts far more portfolio 
 investment than its peers, with inflows as a proportion of 
 GDP amounting to almost double that of other emerging 
 markets.  During the period 1997 to 2000, portfolio 
 inflows into South Africa averaged 5 percent of GDP, with 
 South Africa benefiting from an exodus of capital from 
 Asia during that period.  According the study, more than 
 70 percent of portfolio inflows during the period 1994 to 
 2002 went into the equity market, with SA attracting more 
 equity flows than other emerging markets.   The IMF study 
 shows that South Africa's trade openness is far lower than 
 other emerging markets.   Other factors where South Africa 
 ranks low are its economic growth performance, 
 infrastructure and crime levels.  The study also shows 
 that exchange rate volatility has a crucial role to play, 
 with lower volatility likely to boost FDI, but probably 
 reduce portfolio investment.  The rand is one of the most 
 volatile currencies in the world. The currency has doubled 
 in value against the dollar after reaching a record low of 
 R13.85/$1 in December 2001.  The IMF says the South 
 African Reserve Bank's (SARB) steady build-up of foreign 
 exchange reserves will help reduce exchange rate 
 volatility.   In 2004, SARB eliminated its foreign 
 exchange debt leading to recent increases in its gross 
 reserves, although the level of reserves remain low 
 compared to other emerging markets.  Source:  Business 
 Day, January 5; IMF Country Report No. 04/379. 
 
 GOVERNMENT SET TO MEET 3.2 PERCENT BUDGET DEFICIT TARGET 
 --------------------------------------------- ----------- 
 
 ¶3.  The government expects to meet its revised deficit 
 target of 3.2 percent of gross domestic product this 
 fiscal year, according to consultancy Econometrix. 
 Government revenue grew 17.9 percent in November, 
 substantially higher than the full year budgeted revenue 
 growth of 9.6 percent.  November's revenue growth meant 
 that revenue for the first eight months of the 2004/05 
 fiscal year increased 11.7 percent.  Company tax revenue 
 fell sharply, but growth in personal tax revenue, transfer 
 duties, excise duties and the fuel levy more than made up 
 for low corporate tax growth.  Government expenditure in 
 November increased 16.1 percent y/y, above the full year 
 budgeted growth of 13.1 percent.  Growth in expenditure 
 for the first eight months was 11.2 percent, less than the 
 budgeted growth rate.  Econometrix predicts little problem 
 in financing its increased infrastructural spending in the 
 current fiscal year, although future infrastructural 
 spending needs are significant.  Source:  Business Report, 
 January 4. 
 
 GASOLINE PRICES TO DECLINE IN FEBRUARY 
 -------------------------------------- 
 
 ¶4.  The Department of Minerals and Energy announced that 
 the retail price of 97 octane unleaded petrol is 
 anticipated to drop by 52 rand cents a liter, and the 
 wholesale price of diesel containing 0.05 percent sulphur 
 to decrease by 39 rand cents a liter in February. 
 Unleaded and leaded 93-octane petrol should decrease by 44 
 rand cents a liter.  Even though fuel prices should 
 significantly decline in February, corresponding decreases 
 in transport and food prices are not expected because of 
 sustained consumer spending and fuel costs being a small 
 percentage of input costs.  Expectations for food prices 
 and transport costs remain constant due to increased 
 maintenance costs and wage pressures.  Source:  Pretoria 
 News, January 4. 
 
 ECONOMIC FORECASTS FOR 2005 
 --------------------------- 
 
 ¶5.   Many economists and analysts did not predict the 
 rand's crash at the end of 2001, and most did not foresee 
 the rand's subsequent strength.  But after three 
 successive years of gains, analysts have come around to 
 the view that the rand's strength may continue.   ABSA 
 bank economist Karen Smith-Ford says the rand could end 
 the year at about R5.63 to the dollar, similar to its 
 current trading levels.  The dollar will be the wild card 
 this year with more weakness expected because of the U.S. 
 economy's current account and fiscal deficits.  A sharp 
 move in the dollar poses the risk of boosting the rand 
 further into overvalued territory, and putting more strain 
 on the export sector as exports become less uncompetitive. 
 The strong rand, however, will continue to be good news 
 for inflation, as import prices remain low and domestic 
 producers restrict price increases in order to remain 
 competitive against cheap imports.  Economists expect that 
 the targeted inflation measure CPIX (consumer inflation 
 excluding mortgage costs) will remain comfortably within 
 the 3 to 6 percent target range for this year.  Standard 
 Bank economist Elna Moolman says CPIX will probably remain 
 at the bottom half of the target range for most of the 
 year, peaking at 4.4 percent and averaging 3.9 percent for 
 the full year.  The low inflation numbers could leave 
 enough room for the South African Reserve Bank (SARB) to 
 lower interest rates again this year, economists say. 
 Efficient Group economist Nico Kelder says rates could be 
 cut by about 0.5 percentage points next month, and 
 possibly again in April.  The SARB kept its repurchase 
 rate unchanged at 7.5 percent in December, citing high 
 domestic spending and uncertainty about the rand's 
 strength as potential inflation risks.  Domestic spending 
 gave a boost to economic growth last year, lifting it to 
 an eight-year high of 5.6 percent in the third quarter (on 
 a seasonally adjusted and annualized basis).  Efficient 
 Group's growth forecasts are higher than most, with gross 
 domestic product (GDP) estimated to rise 5.7 percent this 
 year, up from an expected 3.8 percent in 2004.  Kelder 
 says domestic demand will continue to drive the local 
 economy, but exports are likely to show more substantial 
 growth in the face of a fairly stable exchange rate. 
 Despite the higher growth rates, economists concur that 
 this is unlikely to make a significant dent into the 
 unemployment numbers. South Africa's official unemployment 
 rate, counting only those who are actively looking for 
 work stands at 27.8 percent, or 4.6 million people. The 
 unemployment rate increases to 41.2 percent, or 8.4 
 million people, when discouraged job seekers are included. 
 The Efficient Group expects the current account deficit to 
 increase, reaching R45 billion ($7.9 billion using 5.7 
 rands per dollar), or 3.2 percent of GDP in 2005, slightly 
 worse than last year's estimated deficit of R40 billion, 
 or 3 percent of GDP.  Source:  Business Day, January 4. 
 
 SERVICE SECTOR SETA FACES FUNDING CRISIS 
 ---------------------------------------- 
 
 ¶6.  The Services Sector Education and Training Authority 
 (SETA) has declared a moratorium on new learnerships 
 (apprenticeships) until at least July.  The SETA said 
 resumption of its primary activity of starting 
 learnerships in the services sector would be "subject to 
 sufficient discretionary funding availability and 
 satisfactory conclusion of quality assurance issues."  The 
 90,000 companies registered with the SETA will continue 
 paying their skills development levies a total of about 
 R40 million ($7 million using 5.7 rands per dollar) a 
 month to the South African Revenue Service without being 
 able to obtain the benefits for which they are paying. 
 About 80 percent of the fees revert to the SETA, which 
 means that, for at least six months, more than R190 
 million ($33 million) will be used either to pay the 
 authority's debts or to maintain its infrastructure. 
 Dozens of companies have disputed comments made recently 
 by a SETA spokesperson that claimed that creditors had 
 been paid just before the SETA closed on December 15 for 
 the holiday season.  Numerous organizations, including the 
 South African Chamber of Business (SACOB), said they had 
 received no money despite promises of payment.  According 
 to SACOB's CEO James Lennox, the Labor Department as well 
 as the SETAs have repeatedly asserted that the skills 
 development levy (which amounts to 1 percent of a 
 company's payroll) is not a tax.  The impact of the 
 service sector SETA's actions might be that companies that 
 are participating in learnerships and sponsored skills 
 programs will refuse to participate in the government's 
 job creation initiatives, especially the smaller companies 
 not having enough cash flow to pay the SETA without 
 receiving any benefits.  One creditor, the X-Pert project 
 management group, is owed nearly R10 million ($1.7 
 million) with the amount increasing by more than R700,000 
 a month because it is carrying the costs for more than 400 
 apprentices, 55 of whom have physical or other 
 disabilities for which the SETA is responsible.  Source: 
 Business Day, January 4. 
 
 HARTLEY