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 001054 
 
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 
           March 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: 
 -  February Manufacturing Trade Indicators Improve 
 Slightly; 
 -  Advice to Mbeki:  Borrow and Invest More Would Yield 
 Higher Growth; 
 -  Reserve Bank Increases Gross Reserves by $508 Million; 
 -  SA To Target Sources of FDI; 
 -  Regulations Still A Problem; 
 -  Tourism Creates 17,000 Jobs; 
 End Summary. 
 
 FEBRUARY MANUFACTURING TRADE INDICATORS IMPROVE SLIGHTLY 
 --------------------------------------------- ----------- 
 
 ¶2.  Current manufacturing trade conditions improved 
 slightly in February according to the South African Trade 
 Management Indices.  Expectations remained strong, but 
 unchanged compared to January's levels.  The trade 
 activity index, measuring current trading conditions, 
 reached 48.  This level is still below the expansionary 
 50, but above January's level of 47.  Sales volumes, 
 purchase and selling prices and new orders all reached 
 expansionary levels, while inventories, employment, and 
 order backlogs experienced reductions in activity.  Trade 
 expectations over the next six months remain optimistic 
 and unchanged from January's level of 63.  Traders have a 
 very positive outlook for business, as increases in 
 disposable income from tax cuts and moderate inflation are 
 expected to have a positive impact on trading conditions. 
 Expectations of strong sales volumes and new orders are 
 the strongest in February, with over 70 percent of 
 respondents expecting favorable conditions.  Fifty percent 
 of survey respondents expected no change in employment 
 over the next six months.  Source:  Business Day, March 4; 
 Standard Bank, SATMI, March 3. 
 
 ADVICE TO MBEKI:  BORROW AND INVEST MORE WOULD YIELD 
 HIGHER GROWTH 
 --------------------------------------------- ------- 
 
 ¶3.  The International Investment Council, an informal 
 Presidential advisory group, thinks that South Africa can 
 reach six percent annual growth prior to the 2014 target 
 date by increased borrowing and investing.  According to 
 the ten members of the Council, economic growth has been 
 limited by a skills shortage and labor market rigidities, 
 but South Africa is able to finance policies that would 
 increase the growth rate and job creation at a faster 
 rate.  However, Pan African Advisory Services CEO Iraj 
 Abedian warned that a more expansionary fiscal policy with 
 a higher budget deficit and higher government borrowing 
 for investment would be possible only if supply side 
 constraints, such as the skills shortage and the lack of 
 implementation capacity, were addressed.  Government had 
 to ensure that there was not a heavy regulatory burden on 
 enterprises.  Council members assert that companies should 
 be given greater freedom to import skills and foreign 
 exchange controls should be removed, as the strong 
 currency showed that the international market, and 
 investors, had confidence in the rand.  The Council also 
 emphasized the need for South Africa to explain the 
 historical, economic and political rationale for black 
 economic empowerment, which was often misunderstood 
 abroad.  Members of the council who attended the weekend 
 talks were Tata Sons chairman Rattan Tata, Commerzbank's 
 Martin Kolhaussen, DaimlerChrysler CEO Jurgen Schrempp, 
 Astra Zeneca's Perce Barnevik, Mitsubishi's Masaki Miyaji, 
 AngloGold Ashanti's Sam Jonah, Independent News chairman 
 Sir Anthony O'Reilly, Mittal Steel's Lakshmi Mittal, 
 Compahia Vale do Rio CEO Roger Agnelli, Pan African 
 Advisory Services CEO Iraj Abedian, and Reuters Group 
 chairman Niall Fitzgerald.  Source:  Business Day, March 
 ¶7. 
 
 RESERVE BANK INCREASES GROSS RESERVES BY $508 MILLION 
 --------------------------------------------- -------- 
 
 ¶4.  The South African Reserve Bank (SARB) added $508 
 million (R3 billion) to the country's foreign gross 
 reserves in February to push the overall total closer to 
 $16 billion.  This increase adheres to the SARB's pledge 
 of not taking any aggressive action in the market to 
 influence the strength of the rand.  Although the bank 
 more than doubled January's $234 million increase in gross 
 reserves, analysts believe the SARB did not fully exploit 
 this year's four percent appreciation in the rand against 
 the dollar so far.  In February, net reserves, or the 
 international liquidity position, increased by $527 
 million to $12.2 billion.  Ever since South Africa closed 
 a $23.2 billion net open forward position (NOFP) in early 
 2003, the SARB has steadily built the reserves, 
 culminating in the country receiving an investment upgrade 
 from the world's largest credit ratings agency, Moody's 
 Investors Service.  A debate regarding the appropriate 
 level of reserves for South Africa prompted the government 
 to establish a committee to determine the foreign reserves 
 target.  The committee, which consists of SARB and 
 National Treasury officials, will publish its 
 recommendations later this year.  The International 
 Monetary Fund recommends that foreign reserves be able to 
 cover a country's imports for three months.  At $15.6 
 billion, South Africa has enough foreign currency to buy 
 imports for three months, but some analysts advocate 
 having six months' import cover.  However, Andre Roux, the 
 head of fixed income at Investec Asset Management, argued 
 that there was no need to invest South Africa's savings in 
 a currency that was fast losing its value.  Dennis Dykes, 
 the chief economist at Nedcor, said the bank's policy of 
 gradual accumulation of foreign reserves implied a firm 
 rand, low inflation and interest rates, and strong demand 
 for imports in the future.  Source:  Business Report and 
 Business Day, March 8. 
 
 SA TO TARGET SOURCES OF FDI 
 --------------------------- 
 
 ¶5.  The International Marketing Council, responsible for 
 promoting South Africa abroad, has identified countries to 
 target on as potential sources of foreign investment in 
 South Africa.  Focused marketing of South Africa should be 
 aimed at the United States, United Kingdom, China, India, 
 Japan, the Netherlands, France, Germany and Brazil.  The 
 Council recommends France because it provides a launch pad 
 into French-speaking countries all over the world and 
 Brazil because of its position in Latin America.  A 
 marketing campaign would be conducted in these countries 
 to promote South Africa as an investment destination with 
 the bulk of the council's R18 million ($3.1 million, using 
 5.8 rands per dollar) budget being concentrated on mass 
 media communication and advertising.  The council noted 
 that South Africa had consistently underperformed its 
 potential in terms of foreign direct investment (FDI) 
 flows and expects that global foreign direct investment to 
 increase over the next several years.  Global growth 
 should remain high with increased revenues and net profits 
 for the top 500 companies in the United States and the 
 1000 largest Asian transnational corporations.  The agency 
 has a budget of R17 million ($2.9 million) this year: R7 
 million from the state, R5.3 million from broadcasters and 
 R4.8 million from print media.  A cap of 25 percent had 
 been placed on administration costs relative to total 
 income. The agency's board has so far approved 63 media 
 projects.  Source:  Business Day March 9. 
 
 REGULATIONS STILL A PROBLEM 
 --------------------------- 
 
 ¶6.  According to the latest annual Grant Thornton survey 
 of international business owners, business growth in South 
 Africa was hampered by regulations and red tape.  The 
 construction industry appeared to be most affected, with 
 68 percent of business owners reporting that red tape was 
 their biggest growth constraint.  It was followed by the 
 services sector with 44 percent and the manufacturing 
 sector with 38 percent.  The retail sector was least 
 affected, with just 28 percent of business owners 
 reporting red tape as a growth barrier.  Overall, 41 
 percent of business owners cited regulation and red tape 
 as the biggest business constraint, while the availability 
 of a skilled workforce came a close second, with 37 
 percent.  On a regional basis, 68 percent of business 
 owners in Gauteng listed red tape and regulation as their 
 greatest constraint, followed by 54 percent in Port 
 Elizabeth and East London, 42 percent in Durban and 38 
 percent in Cape Town.   The concerns of South African 
 business owners echo those of business owners around the 
 world.  The study found that 36 percent all respondents 
 saw regulation and red tape as the biggest threat to 
 business expansion for the second consecutive year. 
 Source:  Business Report, March 9. 
 
 TOURISM CREATES 17,000 JOBS 
 --------------------------- 
 
 ¶7.  The Tourism Enterprise Program (TEP), initially funded 
 by private enterprise through the Business Trust, created 
 over 17,000 jobs over the past four years.  The TEP 
 received funds from The Business Trust and The Department 
 of Environmental Affairs and Tourism (DEAT) to continue 
 its work for an additional three years.  Created in 2000 
 and expected to last for four years, the project's aim was 
 to aid the expansion of small, medium and micro 
 enterprises (SMME) in the tourism economy, resulting in 
 job creation and income generating opportunities.  Initial 
 four-year targets for TEP were set by The Business Trust, 
 which included the creation of a minimum of 10,000 jobs, 
 the facilitation of 450 million rand of incremental 
 revenues for small businesses and measurably assisting 
 1,000 enterprises to grow.  Four years later, these 
 initial targets were exceeded, with over 2,000 small 
 enterprises and over 17,000 jobs created.  TEP's 
 objectives for the next phase include assisting 2,000 
 small enterprises to create an additional 20,000 jobs, 
 while achieving a target of 1.2 billion rand in 
 incremental revenue for these enterprises.  Source:  I-Net 
 Bridge, March 10. 
 
FRAZER