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 000949 
 
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 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: 
 -  January Trade Deficit Widens; 
 -  Mboweni Comments on SADC Regional Integration Targets; 
 -  Higher State Spending and Oil Prices May Dim Chance for 
 Interest Rate Cuts; 
 -  Money Supply and Credit Growth Remains High in January; 
 -  Manufacturing Sector Shows Signs of Expansion in 
 February; 
 -  February New Vehicle Sales Increase 32.5%; 
 End Summary. 
 
 JANUARY TRADE DEFICIT WIDENS 
 ---------------------------- 
 
 ¶2.  Preliminary figures released by South African Revenue 
 Service show January's trade deficit reached R3.4 billion 
 ($577 million, using 5.9 rands per dollar), much higher 
 than the Bloomberg's survey median forecast of R1.3 
 billion.  This was the ninth trade deficit in 10 months, 
 with December's trade surplus of R2.8 billion being the 
 only month of a positive trade balance.  The current 
 account deficit, measuring trade in goods and services, 
 reached 2.3 percent of GDP in 2004 and the 2005 Budget 
 Review expects it to reach 3.1 percent in 2005.  January's 
 trade deficit was primarily due to a 28.6 percent 
 reduction in exports, falling to R20.5 billion compared to 
 December's R28.6 billion.  January's imports were 7.8 
 percent lower, at R23.8 billion compared to December's 
 R25.8 billion.  Exports of base metals, mineral products, 
 precious stones and machinery explained the January's 
 export decline; imports of mineral products and motor 
 vehicles, aircraft and ships accounted for the import 
 reduction.  Source:  Business Day, March 1; Standard Bank, 
 Foreign Trade Alert, February 28. 
 
 ¶3.  Comment.  The export sector was not a major source of 
 South African growth in 2004.  The rand has appreciated 39 
 percent against the dollar since 2002, leading to 2004 
 import growth far exceeding export growth.  As a result of 
 the strong rand and robust domestic demand in 2004, the 
 value of South African imports increased by 18.6 percent 
 due to increased imports of capital equipment.  In 2004, 
 the import shares of machinery, vehicles and mineral 
 products were 26.1, 13.1, and 15.3 percent respectively. 
 Machinery imports increased 12.8 percent, vehicle imports 
 increased 34.5 percent, and imports of mineral products 
 increased 41.9 percent.  The value of exports increased by 
 7 percent, primarily due to exports of precious and base 
 metals and mineral products.  Textile exports declined by 
 20 percent and vehicle exports were stagnant, showing a 
 decline of 0.2 percent in 2004.  Following several months 
 of trade deficits in 2004, most analyst expect continuing 
 months of trade deficits in 2005.  End comment. 
 
 MBOWENI COMMENTS ON SADC REGIONAL INTEGRATION TARGETS 
 --------------------------------------------- -------- 
 
 ¶4.  Following a meeting between Southern Africa 
 Development Community (SADC) central bank governors and 
 executives from the European Central Bank, South African 
 Reserve Board Governor Tito Mboweni highlighted the 
 importance of reaching convergence targets ahead of a 
 planned monetary union in 2016.  The 13 SADC member 
 countries have agreed to achieve single digit inflation 
 figures by 2008, 5 percent by 2012 and 3 percent by 2018. 
 Convergence targets have been set on budget deficits, the 
 nominal value of public debt, external reserves and the 
 central bank credit.  Planned SADC milestones include (1) 
 a SADC free-trade zone by 2008; (2) a customs union by 
 2010; (3) a common market by 2015; and (4) monetary union 
 by 2016.  Mboweni hoped that SADC countries would declare 
 their commitments to lower inflation publicly, and 
 mentioned that Zimbabwean politics were having too great 
 an effect on the performance of its economy.  Source: 
 Business Day, March 1. 
 
 ¶5.  Comment.  The following table shows 2004 inflation in 
 SADC members having inflation above single digits and 
 highlights the extent of adjustment required to attain 
 inflation convergence by 2008. 
 Table 1.  Selected SADC Member 2004 Consumer Price 
 Inflation 
      2004 Consumer Price Inflation 
 Angola         45.3% 
 Malawi         11.5% 
 Mozambique     12.7% 
 Zambia         18% 
 Zimbabwe       381.4% 
 End comment. 
 
 HIGHER STATE SPENDING AND OIL PRICES MAY DIM CHANCE FOR 
 INTEREST RATE CUTS 
 --------------------------------------------- ---------- 
 
 ¶6.  The 2005 budget calls for a real 7.5 percent increase 
 in government non-interest expenditures and extended R11 
 billion ($1.9 billion) in tax cuts to individuals, 
 companies and small businesses.  Government expenditure as 
 a percent of GDP should reach 28.2 percent in 2005/06 
 compared to 26.6 percent in 2003/04, signaling continuing 
 expansionary fiscal policy.  The past two Monetary Policy 
 Committee statements expressed concern about inflationary 
 impacts of continuing strong consumer demand, postponing 
 interest rate reductions despite improvement in consumer 
 inflation.  Increasing government expenditures, consumer 
 demand along with rising oil prices puts inflationary 
 concerns at the top of many economic analysts.  Others 
 argue that South Africa's increasing government 
 expenditures are not cause for concern, as long as most of 
 it is spent on infrastructure rather than consumption. 
 Source:  Business Day, February 28. 
 
 MONEY SUPPLY AND CREDIT GROWTH REMAIN HIGH IN JANUARY 
 --------------------------------------------- -------- 
 
 ¶7.  January money supply and credit growth continue to 
 grow in double digits, not signaling a typical January 
 slowdown.  Demand for private sector credit increased by 
 15.2 percent, a 13-month high, compared to December's 
 increase of 13.5 percent.  The consumer credit categories 
 (installment sales, mortgage and leasing finance) 
 increased 23.6 percent compared to December's increase of 
 22.8 percent.  M3 growth slowed to 12 percent compared to 
 December's increase of 12.8 percent, primarily because of 
 an increase in government deposits.  Brait economist Colen 
 Garrow pointed out that the lowest nominal interest rates 
 in 24 years, R72 billion in income tax relief since 1995 
 and an increase in coverage of welfare and social security 
 benefits contributed to the strong growth in credit.  With 
 rising oil prices, continued strong credit demand and 
 signs of improved manufacturing output growth, most 
 economic forecasters are now reluctant to predict future 
 interest rate reductions by the South African Reserve 
 Bank.  Source:  Business Day, March 2; Investec, Money 
 Supply and Credit Update, March 1. 
 
 MANUFACTURING SECTOR SHOWS SIGNS OF EXPANSION IN FEBRUARY 
 --------------------------------------------- ------------ 
 
 ¶8.  The Investec Purchasing Managers Index (PMI) rose 
 above 50 in February signaling expansion in the 
 manufacturing sector.  The index reached 54.2, a much 
 stronger indicator of manufacturing growth compared to 
 January's level of 49.3.  Business activity and new sales 
 orders improved the most in February as consumer demand 
 growth remained robust, while the employment index 
 continued to show weakness.  The employment index reached 
 48.9 in February, after January's 47.7, and it has 
 remained below 50 for most of 2004.  The survey's six- 
 month expectations index worsened slightly, with the 
 percentage of respondents expecting an improvement in 
 general business conditions falling to 46 percent compared 
 to January's 47 percent.  The manufacturing sector 
 contributes 16 percent of Gross Domestic Product and the 
 strong rand has impacted its 2004 growth.  Manufacturing 
 output grew by 2.5 percent in the last quarter 2004, 
 compared to 6.3 percent growth in the third quarter. 
 Source:  Business Day and Business Report, March 2. 
 
 FEBRUARY NEW VEHICLE SALES INCREASE 32.5% 
 ----------------------------------------- 
 
 ¶9.   South African new vehicle sales in February 2005 
 increased by 32.5 percent year-on-year (y/y) to 42,832 
 units, compared to January's (y/y) growth of 20.9 percent. 
 The National Association of Automobile Manufacturers of 
 South Africa (NAAMSA) at the beginning of this year 
 expected growth slightly above 10 percent in 2005, but in 
 the first two months, growth has in fact been 26.6 percent 
 y/y.  NAAMSA warned that the announcement in last week's 
 2005 Budget of changes to the car allowance taxation 
 provisions and the planned changes to the fringe benefit 
 tax treatment of company cars were expected to have an 
 impact on demand patterns and in particular, the more 
 expensive vehicle sector was likely to be negatively 
 affected.  All types of vehicles showed robust February 
 growth.  New car sales grew by 34.4 percent y/y, new light 
 commercial vehicle (LCV) sales rose by 28.5 percent y/y, 
 new medium commercial vehicle (MCV) sales grew by 49.5 
 percent, and new heavy commercial vehicle (HCV) sales grew 
 by 16.5 percent.  NAAMSA said positive consumer and 
 business sentiment, stable interest rates and stable new 
 vehicle prices, together with an expected improvement in 
 the rate of growth in the South African economy for 2005 
 of over 4% provided conditions conducive to continued 
 growth in new car and commercial vehicle sales during 
 ¶2005.  Source:  I-Net Bridge, March 2. 
 
 
FRAZER