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UNCLAS SECTION 01 OF 04 PRETORIA 000515 
 
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 
           February 4 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: 
 -  Background to the February 9 Monetary Policy Committee 
 Meeting; 
 -  Trade Conditions Weakened in January; 
 -  Money Supply and Credit Growth Remains High; 
 -  Manufacturing Survey Declines; 
 -  January Vehicle Sales Increase 20.9 Percent; 
 -  Vehicle Parts Sector Shows Weakness; 
 -  Draft Immigration Bill Increases Regulations; 
 -  First Black Appointed as Anglo American's Chief 
 Executive; 
 -  December's Trade Balance Surplus; Yearly Trade Deficit; 
 -  Retail Sector Receives 8.8 Percent Wage Increase; and - 
 -  Deregulation of Telecommunications Sector Starts. 
 End Summary. 
 
 BACKGROUND TO THE FEBRUARY 9 MONETARY POLICY COMMITTEE 
 MEETING 
 --------------------------------------------- --------- 
 
 ¶2.  Comment.  On February 9-10, the Monetary Policy 
 Committee meets to decide the direction of interest rates 
 for the next two months.  Most analysts predict that the 
 Committee will decide to leave interest rates unchanged; 
 however, the following five articles highlight short-term, 
 conflicting economic trends describing the current state 
 of the South African economy, making predictions about 
 next week's interest rate decision difficult.  The second 
 Monetary Policy Committee meeting in 2005 is scheduled for 
 April 13 and 14.  End Comment. 
 
 TRADE CONDITIONS WEAKENED IN JANUARY 
 ------------------------------------ 
 
 ¶3.  The South African Trade Management Indices weakened in 
 January, with the trade activity index below 50, implying 
 a contraction in trading activity.  Seasonally adjusted, 
 the trade activity index reached 48, compared to 
 December's value of 50.  January is the third consecutive 
 month showing gradual weakening of the trade activity 
 index.  The trade expectations index (TEI), measuring 
 expectations of trade conditions for the next six months, 
 indicates that medium-term sales expectations should 
 improve.  The TEI increased to 63 compared to December's 
 60, with expectations regarding sales volumes, new orders 
 and purchase prices being especially strong.  The 
 converging trend of the two activity measures offers more 
 conflicting evidence on the future expansion of the South 
 African economy.  Source:  Standard Bank, SATMI, February 
 ¶3. 
 
 MONEY SUPPLY AND CREDIT GROWTH REMAINS HIGH 
 ------------------------------------------- 
 
 ¶4.  In December, money supply growth (M3) grew 12.8 
 percent (y/y), slowing somewhat, although growth in 
 private sector credit extension (PSCE) accelerated, 
 reaching 13.6 percent.  The accelerating growth of private 
 sector credit extension, reflecting strong consumer 
 demand, may be a major factor influencing the Monetary 
 Policy Committee.  Over the past three months, PSCE has 
 shown healthy growth at 10.2 percent, 10.4 percent and 
 13.6 percent, for October through December 2004.  In 
 December, credit for installment sales, mortgage advances 
 and leasing finance experienced growth of over 15 percent, 
 at 21.2, 24.1 and 15.6 percent respectively, while credit 
 for investment and discounted bills declined.  December's 
 growth in PSCE was largely driven by private sector credit 
 demand components and underlying consumer demand, 
 especially in durable goods.  These fourth quarter 2004 
 trends are expected to fuel growth in 2005.  In 2004, 
 growth in consumption has been financed largely by credit, 
 which has led to concerns about the sustainability of the 
 current economic expansion.  However, reductions in 
 financing costs have allowed the debt to income ratio 
 (55.4 percent in 2004 Q3) to remain relatively low. 
 Source:  Standard Bank, Money Supply Alert and Investec 
 Money Supply Alert, January 31; Business Day, February 1. 
 
 ¶5.  Comment.  CPIX inflation (consumer inflation excluding 
 mortgage costs) slowed to 4.3 percent y/y in December, 
 below the midpoint of the 3-6 percent inflation target 
 band, helped by the strong rand.  Based on inflation 
 figures alone, additional rate reductions could be 
 expected; however, trends in private sector credit demand 
 reduce the chances of additional rate cuts.  Recent 
 statements by Tito Mboweni, the South African Reserve 
 Bank's (SARB) Governor, highlight continuing inflation 
 concerns.  The Governor says that the SARB wanted a 
 competitive exchange rate "which brings about a proper 
 balance in the earnings of exporters, but also contributes 
 significantly to low inflation from the import side of the 
 equation." End Comment. 
 
 MANUFACTURING SURVEY DECLINES 
 ----------------------------- 
 
 ¶6.  In January, the Purchasing Managers' Index (PMI), a 
 leading indicator of manufacturing output, showed signs of 
 weakening, falling to 49.3, the first time below 50 in 15 
 months, compared to December's value of 53.2.  A value 
 below 50 indicates that more managers are experiencing 
 worsening business conditions than those expecting 
 improvement.  The PMI also indicated a January pause in 
 growth of consumer demand, with the subindex measuring new 
 sales orders dropping to 49.7 compared to December's 57. 
 Strong domestic consumer demand is not offsetting the 
 effects of the strong rand and weak global demand on the 
 manufacturing sector.  Statistics SA recently released 
 November's manufacturing production, showing a monthly 1.2 
 percent decline, also indicating a slowdown in 
 manufacturing production.  In 2004, the rand appreciated 
 18 percent against the dollar, leading to South Africa's 
 2003 trade surplus of R16 billion turning to 2004's trade 
 deficit of R12.5 billion.  In 2003, the manufacturing 
 sector accounting for 16 percent of GDP, contributed more 
 than half of South Africa's exports.  Source:  Business 
 Day and Business Report, February 2. 
 
 JANUARY VEHICLE SALES INCREASE 20.9 PERCENT 
 ------------------------------------------- 
 
 ¶7.  Motor vehicle sales grew by 20.9 percent in January 
 (y/y), with passenger cars showing growth of 22.2 percent, 
 according to statistics released by the National 
 Association of Automobile Manufacturers of South Africa 
 (NAAMSA).  In January, the top five passenger car 
 manufacturers include:  (1) Volkswagen at 19.1 percent 
 market share; (2) Toyota having 18.4 percent share; (3) 
 DaimlerChrysler with 16.7 percent share; (4) General 
 Motors SA with 9 percent share; and (5) Ford Motor Company 
 with 7.5 percent share.  Sales of commercial vehicles 
 showed strong January growth at 35.6 percent, leading to 
 expectations that 2005 motor sector's growth will remain 
 robust.  The car market is expected to continue growth 
 next year.  At worst, interest rates should remain 
 unchanged, given December's CPIX inflation of 4.3 percent, 
 allowing consumers to continue to finance asset purchases 
 through debt.  NAAMSA reports that real vehicle prices 
 declined by 3.5 percent in December, another reason for 
 expecting continuing strong market conditions.  Source: 
 Standard Bank, Motor Alert, February 2. 
 
 VEHICLE PARTS SECTOR SHOWS WEAKNESS 
 ----------------------------------- 
 
 ¶8.  According to Clive Williams, executive director of the 
 National Association of Automotive Components and Allied 
 Manufacturers, the vehicle component sector is facing 
 increased prospects of production cuts.  The strong rand 
 is cutting into profit margins on exports and keeping 
 domestic prices low while imported component prices 
 continue to decline.  According to Williams, small parts 
 companies that had been building up distribution networks 
 in the United States over the past five years are 
 abandoning their export programs and only large companies, 
 with economies of scale, are able to still export.  Local 
 car manufacturers are limiting component price increases, 
 as imports provide competitive pressure on prices. 
 Vehicle and parts exports to the U.S. were valued at $150 
 million in 2000, $359 million in 2001, $572.9 million in 
 2002; however in November 2004, exports to the U.S. 
 declined 23.2 percent (on a year-to-date basis), reaching 
 $530.3 million.  Car manufacturers have announced recent 
 plans to increase South African investment, with both 
 Volkswagen planning to increase its exports from South 
 Africa by 45 percent and Toyota planning to increase its 
 South African exports from 10,000 to 100,000 by 2010. 
 Source:  Business Day, February 2. 
 
 DRAFT IMMIGRATION BILL INCREASES REGULATION 
 ------------------------------------------- 
 
 ¶9.   Draft immigration regulations, issued by the Home 
 Affairs Department and published for comment, appear 
 significantly stricter than earlier proposals, and suggest 
 a deliberate effort to tighten up immigration procedures. 
 The business permit for entrepreneurs wishing to start 
 businesses in South Africa now asks potential investors to 
 meet more requirements.  In the past they had to meet at 
 least just two out of seven requirements before being 
 granted approval.  Now they have to comply with all seven 
 requirements.  In addition to having to provide R2.5 
 million ($420,000) in financial guarantees, the main 
 criterion in the past, would-be investors would now have 
 to supply proof of a business plan.  The business plan 
 would outline its feasibility both in the short and long 
 term, show proof of entrepreneurial skill, demonstrate 
 that they would permanently employ at least five citizens 
 or five permanent residents, provide proof of the export 
 potential of the business, and include a police-clearance 
 certificate.   Linda Lamprecht, an immigration expert at 
 PricewaterhouseCoopers, stated that the criteria would 
 affect small and medium business operations most.  She 
 also stated that the requirement of requiring potential 
 investors to contribute to the geographical spread of 
 economic activity, would also have negative effects.  The 
 Department of Home Affairs defended the new regulations, 
 saying they would contribute towards the development of an 
 immigration policy framework that responded to both the 
 "developmental and socioeconomic needs of our country, the 
 continent and the world."  Sourcee:  Business Day, 
 February 1. 
 
 FIRST BLACK APPOINTED AS ANGLO AMERICAN'S CHIEF EXECUTIVE 
 --------------------------------------------- ------------ 
 
 ¶10.  Larazus Zim takes over South African operations at 
 Anglo American and becomes the first black appointed as a 
 chief executive officer at Anglo American.  Tony Trahar, 
 the previous chief executive for South African operations, 
 will remain chief executive of London-listed Anglo 
 American and chairman of the South African operations. 
 According to Trahar, South Africa remained the largest 
 portion of Anglo's portfolio, contributing 35 percent of 
 its profits.  Zim was appointed Trahar's deputy in 2003, 
 working primarily with the company's South African 
 operations and placing importance on cooperation between 
 business and government.  Source:  Business Report and 
 Business Day, February 1. 
 
 DECEMBER'S TRADE BALANCE SURPLUS; YEARLY TRADE BALANCE 
 DEFICIT 
 --------------------------------------------- --------- 
 
 ¶11.  For the month of December, the trade balance showed a 
 small surplus at R2.8 billion; although for the year, it 
 showed a R12.5 billion deficit, below the 2003 surplus of 
 R16.1 billion.  December's trade surplus followed six 
 months of consecutive monthly trade deficits.  Exports 
 increased 2.5 percent on a monthly basis, rising to R28.6 
 billion, while imports declined by 9.2 percent (m/m) 
 reaching R25.8 billion, despite evidence of strong 
 consumer demand in December.  December's base metals and 
 mineral products increased while exports of vehicles and 
 aircraft as well as machinery declined.  Imports of 
 machinery, plastics, original components, chemicals and 
 metals declined compared to November's export values.  For 
 the year as a whole, exports increased by 7 percent while 
 imports increased by 18.6 percent.  In 2004, South 
 Africa's trade deficit has been easily financed by capital 
 inflows.  In 2005, trade deficits may continue due to 
 continuing strength of the rand and weakening global 
 demand.  In 2005, Standard Bank expects world growth at 
 3.8 percent, with advanced economies growing at 2.5 
 percent and emerging country growth at 5.2 percent, slower 
 than 2004 growth rates.  Source:  Standard Bank, Foreign 
 Trade Alert, January 31. 
 
 RETAIL SECTOR RECEIVES 8.8 PERCENT INCREASE 
 ------------------------------------------- 
 ¶12.  The Department of Labor announced an 8.8 percent wage 
 increase, starting February 1, for workers in the retail 
 and wholesale trade sector.  This increase is above the 
 inflation target of 3-6 percent, but necessary to narrow 
 income gaps between black and white wage earners.  Source: 
 Business Report, February 1. 
 
 DEREGULATION OF TELECOMMUNICATION STARTS 
 ---------------------------------------- 
 
 ¶13.  As of February 1, 2005, the first step towards 
 deregulation of the telecommunications sector has begun. 
 Value-added network service (VANS) providers can now offer 
 voice services (VoIP), provide their own fixed 
 infrastructure, acquire infrastructure from other licensed 
 operators other than Telkom, the telephone parastatal, and 
 resell spare capacity, as can other private 
 telecommunication network (PTN) operators.  Much of the 
 industry believes that private operators will soon be able 
 to offer a variety of services and technologies previously 
 monopolized by Telkom. This would lead to rapid 
 competition on voice calls, internet access, video 
 conferencing and high speed data transmissions. 
 Regulations drawn up by Independent Communications 
 Authority of South Africa (ICASA) propose a license 
 application fee of R30,000 ($5,000 using 6 rands per 
 dollar), a 600 percent hike from the current fee of 
 R5,000.  ICASA also wants every Vans operator to be 30 
 percent owned by black shareholders by October 2005.  Both 
 Telkom and Vodacom have argued the Telecommunications Act 
 does not allow VANS operators to provide their own 
 facilities. This means that such operators must continue 
 leasing their networks from Telkom, or from the cellular 
 operators.  Source:  Business Day, February 1. 
 
 
 FRAZER