This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 PRETORIA 000655 
 
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 11 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: 
 -  Reserve Bank Keeps Interest Rates Unchanged; 
 -  South Africa's FDI Outlook Improves; 
 -  Higher Than Expected Manufacturing Growth in December; 
 -  Retail Sales Remained Strong in November; 
 -  Gov't and Industry Seek Solutions to Textile Crisis; 
 -  Steel Antidumping Duties Revoked; 
 -  Water and Electricity Public-Private Partnerships Have 
 Failed; 
 -  Maize Farmers Face Low Prices and Oversupply; 
 -  Deutsche Bank Sells 25% of SA Business to BEE Group; 
 -  JSE Securities Exchange to Sell Public Shares; 
 -  Some Improvement to SA's Skewed Income Distribution; 
 and 
 -  Low-Cost Bank Account Draws Over Half Million. 
 End Summary. 
 
RESERVE BANK KEEPS INTEREST RATES UNCHANGED 
------------------------------------------- 
 
¶2.  The two-day meeting of the South African Reserve Bank's 
(SARB) Monetary Policy Committee (MPC) has decided to keep 
the repurchase rate steady at 7.5%.  This is the third 
consecutive MPC meeting that has kept interest rates steady. 
Two thirds of economists surveyed by I-Net Bridge forecasted 
no change in the rate, but one third expected a 50 basis 
points cut.  The last 50 basis point cut was announced at 
the August 12, 2004 MPC meeting.  This cut caught the market 
by surprise after the SARB cut interest rates by 550 basis 
points in 2003.  The capital market has seen yields drop by 
more than 180 basis points since August 12, 2004 with the 
benchmark government bond, the five-year R153, yield trading 
at a record low of 7.54% on February 10 compared with 9.38% 
on August 12, 2004 before the MPC announced the surprise 
rate cut.  The next MPC meeting is on April 13 and 14.  (I- 
Net Bridge, February 10) 
 
SOUTH AFRICA'S FDI OUTLOOK IMPROVES 
----------------------------------- 
 
¶3.  South Africa's outlook for foreign direct investment 
this year has improved, according to the South African 
research organization BusinessMap Foundation.  BusinessMap 
director, Reg Rumney, said about $8 billion in foreign 
investment was announced in January alone.  BusinessMap 
tracked investment at about $5.8 billion last year in its 
preliminary calculations, up from about $2.7 billion in 
¶2003.  BusinessMap researcher Michel Hanouch said South 
Africa's stable political and economic outlook had played 
some part in encouraging foreign companies to invest here. 
Hanouch said a large portion of the investment coming 
through this year was from brewer SABMiller's commitment to 
invest R5 billion in South Africa.  SABMiller is seen as a 
foreign company due to its primary listing in the UK, but is 
a South African company in other respects.  Apart from the 
brewer, international vehicle manufacturers have announced 
plans to increase their investments in South Africa. 
Volkswagen and Toyota have both said they plan to invest 
more than R1 billion (approximately $161 million) this year. 
Further investment is expected to come from independent 
power producers invited to supplement Eskom's electricity- 
generation plan.  While the outlook is good, there are some 
factors that can limit investment in South Africa. 
BusinessMap said confidence could be knocked if rand 
volatility returned along with a fall in commodity prices 
and a slowdown in world economic growth.  Traditionally the 
mining sector has attracted high levels of foreign direct 
investment, but the flow of investment in the sector in the 
third quarter of last year was poor.  (Business Day, 
February 9) 
 
HIGHER THAN EXPECTED MANUFACTURING GROWTH IN DECEMBER 
--------------------------------------------- -------- 
 
¶4.  Manufacturing production grew by 7.8% y/y in December 
2004 compared to 5.5% y/y in November.  Growth was higher 
than expected in December, as production usually slows at 
the end of the year.  The main categories contributing to 
the rise were petroleum and chemical products, textiles, 
clothing leather and footwear, food and beverages, as well 
as wood, paper, and printing products.  Declines in 
production were recorded in glass and non-metallic mineral 
products, motor vehicles and parts, furniture, basic iron 
and steel products, and electrical machinery.  Manufacturing 
production average annual growth was 4% in 2004.  (Standard 
Bank and Nedbank, February 8) 
 
RETAIL SALES REMAINED STRONG IN NOVEMBER 
---------------------------------------- 
 
¶5.  According to Statistics South Africa, retail sales at 
constant prices grew by 12.6% y/y in November 2004 after 
growing 12.9% y/y in October.  These strong sales figures 
indicate that consumers took advantage of the favorable 
retail environment.  Strong growth in disposable income, low 
inflation, and low interest rates boosted consumer 
confidence.  Based on the growth trend through November 
2004, December most likely experienced high growth as well. 
Retails sales are expected to remain strong in 2005. 
(Standard Bank and Nedbank, February 10) 
 
GOV'T AND INDUSTRY SEEK SOLUTIONS TO TEXTILE CRISIS 
--------------------------------------------- ------ 
 
¶6.  Last week's meeting between representatives of 
government, labor, and clothing and textile industries 
revived hopes of protecting the troubled industries from a 
surge of cheap imports from China and other east Asian 
countries.  Textile Federation of SA executive director 
Brian Brink said this week that talks were on track and that 
he was optimistic about their progress.  According to the 
South African Clothing and Textile Workers Union (Sactwu), 
the industry has shed about 30,000 jobs in the last two 
years.  A task team consisting of representatives from the 
Trade and Industry Department met in Cape Town last week to 
consider remedies aimed at countering the negative effects 
of cheap imports on the local clothing and textile sector. 
Brink said on Monday that the parties had made progress in 
the negotiations, but that it was premature to say whether 
there would be policy changes.  The parties plan to meet 
again in about a month's time.  The resumption of the task 
team's discussions has not stopped the Textile Federation 
from applying to the Trade and Industry Department for the 
adoption of safeguard measures.  However, Trade and Industry 
Department Deputy Director-General Lionel October said this 
week that safeguard measures were "no panacea."  October 
said that safeguard measures had been used in a bid to 
protect the local footwear industry, with little success. 
Parliament's Trade and Industry Committee said it would hold 
public hearings on the problems. (Business Day, February 9) 
 
STEEL ANTIDUMPING DUTIES REVOKED 
-------------------------------- 
 
¶7.  The South African government revoked hefty antidumping 
duties on steel imports from Russia and Ukraine on February 
¶8.  The move attempts to offer cheaper steel imports for 
South Africa's struggling steel users, but could lead to 
dumping in South Africa.  Ispat Iscor, South Africa's 
largest steel maker, had hoped government would retain the 
duties and warned of "uncompetitive steel trading" if the 
duties were revoked, while the government has been 
pressuring the company to develop a new pricing model. 
South Africa implemented punitive duties of 81.7% and 94.8% 
on Russian and Ukrainian steel, respectively, five years ago 
when it was found that suppliers from those countries were 
dumping steel in South Africa.  The antidumping duties are 
reviewed every five years.  The scrapping of the anti- 
dumping duties appears to be in line with other steps 
government has undertaken to unlock the downstream 
industry's value-adding and job-creating potential.  The 
steps include forcing Ispat Iscor to develop a new pricing 
model, and an incomplete probe into the possible scrapping 
of the general 5% duty applicable to all steel imports into 
South Africa.  The government agency responsible for duties, 
the International Trade Administration Commission, said in 
preliminary findings that the expiry of the antidumping 
duties was likely to lead to the resumption of dumping from 
Russia and Ukraine, but also found that it was unlikely to 
materially injure domestic steel makers.  The decision was 
likely influenced by record demand and steel prices 
globally, which saw Ispat Iscor's profits soaring. 
(Business Day, February 9) 
WATER AND ELECTRICITY PUBLIC-PRIVATE PARTNERSHIPS HAVE 
FAILED 
--------------------------------------------- --------- 
 
¶8.  Public-private partnerships in Africa over the past 15 
years have generally failed to provide water and 
electricity, a new study shows.  According to a study by the 
South African Institute of International Affairs (SAIIA), 
about 600-million people in sub-Saharan Africa lack access 
to electricity, about 300-million have no access to safe 
water, and there were just eight telephones-either cellphone 
or fixed-line-per 100 inhabitants.  The report, released on 
February 8, acknowledged successes achieved by public- 
private partnerships in sectors such as telecommunications, 
transport, ports and eco-tourism, but said that much still 
needed to be done to in water and electricity provision. 
Governments often chose public-private partnerships as an 
alternative to full privatization, which had politically 
contentious aspects.  However, the partnerships are complex 
and often lead to more expensive services for a consumer. 
For example, the 30-year concession of water provision on 
South Africa's Dolphin Coast saw a French multinational SAUR 
Services securing better terms for itself and receiving a 
21% return on investment - while its local partner, Siza, 
was not making a profit from the concession.  The Congress 
of South African Trade Unions (Cosatu), which describes 
public-private partnerships as "a form of privatization," 
said private sector participation should not replace 
government, but should complement government capacity. 
Cosatu economist Neva Makgetla said that private-sector 
contractors often lied about their capacity to deliver, 
especially to poor areas.  Makgetla said private delivery 
"is fine where it will not compromise development aims." 
Some upcoming big projects, which would require private 
sector participation, include the proposed R7 billion 
(approximately $1.1 billion) Gautrain Rapid Rail Link 
project, the R2.5 billion (approximately $403 million) Dube 
Trade Port which incorporates the King Shaka International 
Airport in Durban, and the building of schools and hospitals 
across the country.  (Business Day, February 9) 
 
MAIZE FARMERS FACE LOW PRICES AND OVERSUPPLY 
-------------------------------------------- 
 
¶9.  The free-falling price of maize over the past few months 
has been so severe that some farmers have not bothered to 
plant this season.  The grain's price plunged from more than 
R1,000 a ton (approximately $161) in November to less than 
R600 a ton (approximately $97) in February.  The low price 
has negatively affected farmers' profits, and commercial 
farmers' representative Grain SA is questioning the 
sustainability of the industry.  The price crisis gripping 
South African maize farmers has once again exposed the risky 
nature of commercial farming.  Farmers owe financial 
institutions billions of rand, and some risk losing 
everything this year.  The deregulation of the agricultural 
sector in the 1990s left commercial farmers exposed to the 
risk of drought, exchange rate, and commodity price 
fluctuations.  Grain SA says because costs of input products 
such as tractors, fertilizer, seeds and labor have not 
decreased with the maize price, farmers face shrinking 
margins and are struggling to repay their loans.  On 
average, commercial maize farmers must get R900 a ton in 
order to cover their input costs without making a profit. 
Another problem is the fact that South Africa has maize 
stocks in excess of 3.2 million tons.  This season's yield 
is likely to swell stocks because commercial farmers have 
planted an area even bigger than last year.  This year, 
South Africa's maize farmers are expected to harvest about 9 
million tons.  Grain SA is considering building ethanol 
plants to absorb the surplus.  (Business Day, February 9) 
 
DEUTSCHE BANK SELLS 25% OF SA BUSINESS TO BEE GROUP 
--------------------------------------------- ------- 
 
¶10.  Deutsche Bank sold a 25% share in its South African 
operations to Black Economic Empowerment (BEE) group 
Uthajiri and its employees.  Uthajiri will take a 15% stake 
while the remaining 10% will be held by an employees' share 
trust called Deutsche Bank Black Empowerment Share Trust. 
The beneficiaries of the trust are all black South African 
staff currently working for Deutsche Bank South Africa.  The 
purchase of the 25% will be funded by Deutsche Bank and the 
Uthajiri shareholders.  Uthajiri will have three senior 
executives working for the Deutsche Bank in South Africa. 
Uthajiri, Swahili for wealth, was established in 2003 with 
the aim of being a leading BEE partner in the financial 
services and information, communications and technology 
sectors.  (I-Net Bridge, February 3) 
 
JSE SECURITIES EXCHANGE TO SELL PUBLIC SHARES 
--------------------------------------------- - 
 
¶11.  The JSE Securities Exchange SA is to become a "normal 
company" with publicly-traded shares.  Currently, the 
exchange is owned by 8,000 rights holders, mostly stock 
broking firms.  This is part of a move towards 
demutualization, in line with the introduction of the 
Securities Services Act last week, and follows changes to 
the Income Tax Act last year, which requires the JSE to 
begin paying tax for the first time.  JSE CEO Russell 
Loubser said the 8,000 rights holders will be asked to vote 
on demutualization.  Each right is worth R50,000 
(approximately $8,100), valuing the JSE at about R400 
million (approximately $64.5 million).  If the resolution is 
passed, rights holders could swap each of these rights for 
100 ordinary shares, each worth about R500.  No single party 
will be able to hold more than 15% of the total shares, 
which will partially protect the JSE from a takeover bid. 
Any party wanting to buy a share larger than 15% could apply 
for special permission from the Financial Services Board. 
The JSE shares will not be listed on the main board, but 
traded over the counter between individuals.  Brokers gave 
cautious approval to the move provided that JSE fees do not 
increase.  (Business Day, February 8) 
 
SOME IMPROVEMENT TO SA'S SKEWED INCOME DISTRIBUTION 
--------------------------------------------- ------- 
 
¶12.  A new study by the University of South Africa's Bureau 
for Market Research suggests some improvement in income 
distribution overall, but increasing inequality within race 
groups.  It supports the findings of a number of studies 
done in recent years, which show a decline in inequality 
between racial groups, mainly because of increased social 
grant spending, and better job prospects for blacks, 
resulting in them earning a larger slice of the income pie. 
However, inequality within race groups has increased, 
indicating that the rich have become richer through upward 
mobility, while the poor continue to struggle to improve 
their circumstances.  According to the Bureau for Market 
Research, the number of black households that moved into the 
high income group, earning R153,000 (approximately $25,000) 
a year or more, jumped to 440,000, demonstrating 368% growth 
between 1998 and last year.  White households still dominate 
the high-income category, and during the same six-year 
period their numbers increased 16% to 642,000.  Over the 
same period, the number of black households in the low- 
income category, earning less than R9,600 (approximately 
$1,500), a year dropped sharply.  The main reason for this 
drop seems to be the increase in the child grants and more 
efficient payment of old age pensions.  The study also 
showed a dramatic change in the share of total income earned 
by the various population groups.  In 1960, 69.4% of total 
personal disposable income (adjusting for tax) accrued to 
whites, while blacks earned 23.2%.  In 2000, whites accrued 
43.9%, slightly more than the 43.5% accrued to blacks.  By 
2007, the bureau estimates that blacks will earn 46.5% of 
total personal disposable income, a far greater proportion 
than the white share of 40.4%.  However, despite enjoying 
more of the share of income on a per capita or household 
basis, blacks remain poor income earners for their 
population size compared to other race groups.  After-tax 
income of an average white household is expected to increase 
from R190,563 ($31,000) a year in 2004 to R236,435 ($38,000) 
in 2007.  Black households can expect average incomes to 
increase from R43,533 ($7,000) a year in 2004 to R54,424 
($9,000) in 2007.  In 2001, black households made up almost 
90% of the country's lowest income category.  (Business Day, 
February 8) 
 
LOW-COST BANK ACCOUNT DRAWS OVER HALF MILLION 
--------------------------------------------- - 
 
¶13.  The low-income national banking account, Mzansi, has 
signed nearly 560,000 accounts as of February 7, double the 
expectations based on market research.  PostBank, the 
savings division of the post office, has the largest number 
of Mzansi accounts amongst the five banking institutions. 
Half of the account holders are female and two-thirds of the 
customers were in the 25-54 age group.  Mzansi accounts do 
not appear to be cannibalizing existing accounts, as more 
than 90% of account holders did not have a prior 
relationship with their institution, although customers 
could have switched institutions.  On February 7, 2005, the 
accounts were distributed as follows: PostBank 27.3%; 
Standard Bank 25.9%; Absa 23.9%; First National Bank 16.2%; 
and Nedbank 6.7%.  The Banking Council expects to have 
additional providers of Mzansi accounts this year as 
second/third tier financial institutions see the benefits. 
An average of R290 ($47) is currently being held in each 
Mzansi Account, amounting to a total balance of R160 million 
(approximately $25.8 million) brought into the formal 
banking sector.  The Mzansi account was launched on October 
25, 2004, resulting from two years of work between the 
banking institutions, the Banking Council, and the National 
Economic Development and Labour Council (NEDLAC) in response 
to requirements outlined out in the Black Economic 
Empowerment (BEE) Financial Sector Charter.  The Congress of 
South African Trade Unions (COSATU) complains that Mzansi 
account functions are too limited for self-employed 
customers and others, while banks continue to discuss ways 
to improve the Mzansi accounts to meet the needs of 
customers.  (I-Net Bridge, February 9; Business Day, 
February 10) 
 
FRAZER