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 001505 
 
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 
           April 15 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: 
 -  Surprise Interest Rate Cut; 
 -  Manufacturing Growth Declining; 
 -  Reserve Bank Slows Accumulation of Foreign Exchange; 
 -  Foreign Tourist Arrivals Drop; 
 -  Treasury Will Spend Tax Revenue Surplus to Reduce Debt; 
 -  Trading Activity Stable; Expectations Still High; 
 -  Commercial Property Confidence Strong; and 
 -  Gautrain Will Increase GDP by R2.6 billion. 
 End Summary. 
 
 SURPRISE INTEREST RATE CUT 
 -------------------------- 
 
 ¶2.  The South African Reserve Bank's (SARB) Monetary 
 Policy Committee reduced interest rates by 50 basis points 
 to bring the repurchase rate to 7 percent.  The prime 
 lending rate should be reduced to 10.5 percent.  The 
 Monetary Policy Committee (MPC) noted evidence of slower 
 economic activity in the manufacturing sector as a result 
 of the move by the rand to a higher trading range over the 
 past six months, as noted in the following paragraph.  In 
 addition, recent evidence of slowing inflation and 
 inflationary expectations were also cited.  The latest 
 inflation expectations survey conducted by the Bureau for 
 Economic Research (BER) at the University of Stellenbosch 
 showed a significant decline in inflation expectations. 
 According to the survey, CPIX inflation expectations 
 reached their lowest level since the BER started the 
 survey in 2000.  For the first time, survey respondents 
 expect inflation to be below the upper end of the 
 inflation target band.  On average, CPIX inflation is 
 expected to be at 4.5 per cent, the mid-point of the band 
 for 2005, down from 5.5 per cent in the previous survey. 
 CPIX inflation is also expected to remain within the 
 target range for the next 3 years.  The reduction in 
 interest rates took most analysts by surprise, as a 
 Reuters poll of 15 economists done last week predicted 
 that the SARB would keep the repurchase rate at 7.50 
 percent for the remainder of the year, with any rise in 
 2006 limited to less than 50 basis points.  The unexpected 
 rate cut may signal that the SARB is more convinced that 
 oil prices will soon decline and that it is more concerned 
 about the detrimental impact of a strong rand.  Source:  I- 
 Net Bridge and Standard Bank, MPC Alert, April 14; 
 Business Day April 8. 
 
 MANUFACTURING GROWTH DECLINING 
 ------------------------------ 
 
 ¶3.  Manufacturing production growth has sharply 
 decelerated in the first two months of 2005 compared to 
 December's growth of 7.9 percent, according to statistics 
 based on a revised manufacturing sample by Statistics SA. 
 In January, manufacturing production grew by 3.2 percent 
 y/y and February's growth of 2.7 percent continued the 
 trend of slower growth.  Slower growth in South African 
 manufacturing production reflects rand strength, poor 
 economic growth in European markets, and impacts of high 
 oil prices on importing countries.  Since 35 percent of 
 all South African manufactured exports go to countries in 
 the Euro zone, slower economic growth and increased 
 European spending on higher energy costs have restrained 
 manufacturing export growth.  Manufacturing production 
 continues to grow due to strong local consumer demand. 
 Consumer demand is expected to remain strong in 2005, as 
 the recent R6.8 billion income tax rebates and 
 expectations of stable interest rates should support local 
 demand.  On a quarterly basis, manufacturing production 
 declined 0.6 percent, with 7 out of 10 manufacturing 
 sectors reporting a decline in output.  Food and beverage 
 sector showed the largest quarterly production decline of 
 0.5 percent, followed by wood and paper products and basic 
 iron and steel.  Manufacturing sales showed the same 
 decelerating growth as production, with the first two 
 months' growth in 2005 at 4.9 percent and 4.3 percent, 
 respectively.  Source:  Standard Bank, Manufacturing 
 Unpacked and Statistics SA Release P0341.2, April 14. 
 
 ¶4.  Comment.  The April 14th release of Stats SA in 
 manufacturing sales and production used a new sample for 
 the first time, based on an improved business register, 
 created in July 2004, which included more small businesses 
 that were not required to register for the VAT.  The 
 trends in the new survey results mirror those of the old 
 survey despite recording a 2.6 percent higher level in 
 manufacturing sales.  End Comment. 
 
 
 RESERVE BANK SLOWS ACCUMULATION OF FOREIGN EXCHANGE 
 --------------------------------------------- ------ 
 
 ¶5.  The South African Reserve Bank's (SARB) accumulation 
 of foreign exchange reserves slowed significantly in 
 March, as the rand weakened almost 7 percent against the 
 dollar.  Net foreign exchange and gold reserves, also 
 known as the international liquidity position, increased 
 to $12.4 billion from $12.2 billion in February, an 
 increase of $194 million compared with February's increase 
 of $527 million.  It was the 14th consecutive month that 
 net reserves increased; they are almost double what they 
 were a year ago.  Until recently, South Africa had the 
 lowest reserves among its emerging-market peers.  Its 
 improved reserve position has contributed to last year's 
 sovereign credit rating upgrade by Moody's.  Source: 
 Business Day, April 8. 
 
 FOREIGN TOURIST ARRIVALS DROP 
 ----------------------------- 
 
 ¶6.  Foreign tourist arrivals dropped 2 percent (y/y) in 
 November 2004, according to Statistics SA (Stats SA), due 
 to high oil prices making air travel more expensive and 
 the strong rand.  South Africa is no longer an inexpensive 
 destination.  The reduction in foreign tourists poses a 
 threat to South Africa's tourism industry, which employs 
 about 500,000 people and contributes 7.1 percent to gross 
 domestic product.  November was the first month showing 
 negative y/y growth.  The number of international tourists 
 to SA increased 5 percent in October 2004, compared with 
 the previous year.  Tourists from Germany, France and the 
 U.K., the top sources of South African visitors, declined 
 4.3 percent, 23 percent, and 2.5 percent, respectively. 
 The number of visitors from the rest of Africa rose 8.9 
 percent in November.  More than 92 percent of these were 
 from six neighboring countries, including Lesotho and 
 Swaziland.  Source:  Business Day, April 13. 
 
 TREASURY WILL SPEND TAX REVENUE SURPLUS TO REDUCE DEBT 
 --------------------------------------------- --------- 
 
 ¶7.  Government's R9.6 billion tax surplus raised in the 
 2004-05 fiscal year would be used to repay government debt 
 maturing this year, according to National Treasury 
 Director-General Lesetja Kganyago.  The statement ends the 
 debate over what should be done with the excess.  The 
 Congress of South African Trade Unions had proposed that 
 it be used to fund infrastructure development.  Kganyago 
 told Parliament's Finance Committee that the windfall 
 could not be used for other government expenditure this 
 year because the 2005-06 budget had already been prepared 
 and tabled before revenue collection figures were 
 finalized by the South African Revenue Service.  Repaying 
 debt would reduce debt-servicing costs and release 
 resources to other areas of expenditure.  About R29 
 billion in national debt matures this fiscal year, mainly 
 R152 bonds.  By using the R9.5 billion to settle part of 
 this debt, government's total borrowing requirement would 
 be reduced.  The net public sector borrowing requirement 
 this fiscal year has been estimated by national treasury 
 at R53 billion compared with last year's R38 billion.  The 
 targeted mix of 20 percent foreign government debt and 80 
 percent local debt had been reviewed, with the Treasury 
 deciding not to increase the foreign debt significantly 
 because the risks arising from currency volatility were 
 too great.  Currently, foreign debt represents only 13.5 
 percent of all government debt.  The Treasury plans to 
 borrow up to $1.5 billion on foreign markets so as to 
 avoid crowding out the domestic capital market.  Taking 
 into account a redemption of $200-$300 million in foreign 
 debt, net foreign budgeted borrowing should be $1.3 
 billion.  This move will allow state-owned enterprises to 
 more easily raise additional funds for infrastructure 
 projects on the local market.  Source:  Business Day, 
 April 13. 
 
 TRADING ACTIVITY STABLE; EXPECTATIONS STILL HIGH 
 --------------------------------------------- --- 
 
 ¶8.  March's South African Trade Management Indices (SATMI) 
 showed current trading conditions improved slightly from 
 February's level although expectations for the next six 
 months remained high.  The index for current trading 
 conditions reached 49.1, still below the 50 level, 
 signaling that trading conditions have slightly 
 deteriorated compared to February.  According to SATMI's 
 trading index, trading conditions were best in November 
 2004, reaching 55.7, only to have gradually retreated each 
 month since.  The trade expectations index, measuring 
 expectations for trade conditions for the next six months, 
 reached 63, showing an optimistic view of the medium-term 
 outlook.  In both the activity and expectations indices, 
 the employment component signals that a majority of 
 respondents have increased job opportunities.  This is the 
 first time both current and expected employment has shown 
 increases.  Source:  Standard Bank, SATMI, April 7; 
 Business Day, April 8. 
 
 COMMERCIAL PROPERTY CONFIDENCE STRONG 
 ------------------------------------- 
 
 ¶9.  South Africa's commercial and industrial property 
 market should experience rising lease values, declining 
 vacancies, and more tenants in the next six months, 
 according to eProp's Commercial Property Confidence Index 
 (CPCI).  eProp's CPCI for March 2005 reveals that 75 
 percent of respondents are looking forward to improved 
 business conditions in the short-term.  Eighty-one percent 
 of respondents think that lease values will rise in the 
 next six months and more than 70 percent predict rising 
 occupancies.  More than 20 percent expect to hire more 
 staff.  The CPCI tracks the sentiment of a sample of 
 property managers, asset and portfolio managers, and 
 brokers.  Respondents rate their expectations of ten 
 market factors that are unique to commercial property, 
 including number of leases and sales; value of leases and 
 sales; net operating income; rental and vacancy levels; 
 capitalization rates and staff employed.  A more general 
 category is sentiment about the management of the public 
 environment.  eProp is a research firm devoted to the 
 commercial property market.  Source:  I-Net Bridge, April 
 ¶13. 
 
 GAUTRAIN WILL INCREASE GDP BY R2.6 BILLION 
 ------------------------------------------ 
 
 ¶10.  The Gautrain Rapid Rail Link project, a proposed high 
 speed commuter rail service linking Johannesburg and 
 Tshwane (Pretoria), will create 1,200 permanent jobs and 
 contribute about R2.6 billion ($426 million, using 6.1 
 rands per dollar) to South Africa's gross domestic product 
 (GDP), according to a study released by Brait financial 
 service company.  The Gautrain will have a ripple effect 
 on the economy by creating 70,000 jobs during the 
 construction phase and another 40,000 jobs when the rail 
 service is operational.  The study points to other 
 benefits of Gautrain, such as reduction in congestion, 
 medical costs, and traffic accidents as commuters shift to 
 the rail service.  Estimated savings to the economy should 
 reach R15.3 million ($2.6 million).  Source:  Business 
 Day, April 13. 
 
FRAZER