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 001605 
 
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 22 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: 
 -  International Economic Conditions More Important than 
 Domestic for South African Monetary Policy; 
 -  Russian Banks to Increase Services in South Africa; 
 -  Rand Impacting Tourist Spending; 
 -  SARB Wants Inflation Above 3 Percent; 
 -  China, South Africa Seek Middle Ground on Increase in 
 Imports; and 
 -  Telkom Fees Hindering South African Growth. 
 End Summary. 
 
 INTERNATIONAL ECONOMIC CONDITIONS MORE IMPORTANT THAN 
 DOMESTIC FOR SOUTH AFRICAN MONETARY POLICY 
 --------------------------------------------- -------- 
 
 ¶2.  Favorable global economic conditions, low real 
 interest rates, a weakening dollar, accelerating growth 
 and increasing commodity prices helped make South Africa 
 and other emerging markets recipients of significant 
 international capital.  Rand strength has weakened 
 domestic inflation pressures, allowing the South African 
 Reserve (SARB) to reduce local interest rates.  Buoyant 
 confidence, credit extension, robust motor vehicle and 
 retail sales growth and increasing house prices followed 
 the interest rate cuts.  In predicting South Africa's 
 future interest rates, most analysts focus on domestic 
 credit and demand rather than any international factors 
 impacting the value of the rand.  However, in a global 
 world characterized by substantial capital flows, the SARB 
 has limited control over South African interest rates and 
 currency.  As capital inflows increase, the South African 
 currency becomes firmer, pushing down inflation to the 
 point of threatening the lower end of the target band, 
 forcing interest rate cuts, despite domestic inflation 
 risk factors.  South Africa is an open, small economy, and 
 in understanding the rand's strength, international 
 developments are more important.  From a global 
 perspective, it may be premature to expect an imminent 
 turning point in South African rates.  A major, sustained 
 revival of the dollar, with the concomitant threat of 
 capital withdrawal hindering the outlook for the rand, is 
 probably not at hand.  When the inward expansion of 
 capital begins to recede within a context of domestic 
 imbalances, it is possible that monetary policy aggression 
 will once again surprise, but in the other direction, with 
 rates moving faster upward, once again with apparent 
 disregard for domestic demand conditions.  Source:  Based 
 on a column by Jonathan Stewart, head of fixed interest at 
 RMB Asset Management, Business Times, I-Net Bridge, April 
 ¶18. 
 
 RUSSIAN BANKS TO INCREASE SERVICES IN SOUTH AFRICA 
 --------------------------------------------- ----- 
 
 ¶3.  Russian banks intend to open offices in South Africa 
 to serve a growing number of Russian companies seeking to 
 operate in South Africa, according to Russian Central Bank 
 Deputy Chairman Konstantin Korishchenko.  Korishchenko was 
 accompanied by three Russian commercial banks and the 
 Association of Russian Banks to the first meeting of South 
 African and Russian banking authorities, which began at 
 the South African Reserve Bank.  The Russian banks 
 visiting South Africa are Vneshtorgbank, Bank of Moscow, 
 and Nomosbank.  There is already one Russian state-owned 
 bank with a representative office in South Africa, 
 Vnesheconombank, which started doing business in the 
 country in 2000.  Russian interest in South Africa has 
 grown in recent years.  Russia's largest mining company, 
 Norilsk Nickel, already holds 20 percent of Gold Fields, 
 while Russian company SUAL is considering investing in a 
 smelter in the Coega Industrial Development Zone in SA. 
 Korishchenko said he would welcome any South African banks 
 intending to follow Standard Bank by opening branches in 
 Russia to serve the growing number of South African firms 
 operating there.  Banking Registrar Errol Kruger said 
 while Standard Bank had a successful Russian business, he 
 would be "surprised" if many other local banks followed 
 suit, as Standard Bank is very focused in terms of its 
 niche market in resource banking and really understands 
 that market.  Source:  Business Day and Business Report, 
 April 19. 
 
 RAND IMPACTING FOREIGN TOURIST SPENDING 
 --------------------------------------- 
 
 ¶4.  While the latest monthly tourism statistics to 
 December 2004 from Statistics South Africa show that the 
 number of tourists visiting the country has flattened out 
 since 2001, there is evidence that the strong rand has 
 resulted in foreign tourists spending less money in the 
 country since 2003, according to Old Mutual Asset Managers 
 SA (Omam).  A tourist who had 1,000 euros to spend in 2002 
 came to South Africa with 10,000 rand.  In 2003, however, 
 that same 1,000 euros was worth only 7,150 rand - giving 
 the tourist 2,850 rand (or 28 percent) less to spend.  In 
 2002, South Africa attracted an estimated 700,000 "high- 
 spending" tourists.  These tourists were mainly middle- 
 aged from first world countries coming to South Africa for 
 their first or second time to stay in luxury resorts and 
 hotels, and had a high amount of discretionary spending 
 power.  In 2005, the number of high-spending tourists was 
 expected to decrease by an estimated 10 percent to 630,000 
 and their spending power is also expected to decrease, 
 according to Brian Pyle, a portfolio manager at Omam. 
 Figures in the February annual Satour tourism report 
 confirm the sharp decline in average spending per tourist 
 during 2003.  Despite a 5.3 percent increase in the number 
 of European tourists visiting the country during 2003, 
 average spending fell by 15.9 percent to R11,377 ($1,504, 
 using 7.56, the 2003 annual average rand per dollar) per 
 person.  Europeans comprise almost 20 percent of all 
 foreign visitors to South Africa.  Tourists from the 
 Americas spent 35.9 percent less in 2003 compared with the 
 year before, even though the number of tourists increased 
 by 3.1 percent.  Tourists traveling from Asia and 
 Australia spent R10,141 ($1,341) rand per person in 2003 
 compared with R13,067 the year before, which is a 22.4 
 percent reduction.  Source:  I-Net Bridge, April 19. 
 
 
 SARB WANTS INFLATION ABOVE 3 PERCENT 
 ------------------------------------ 
 
 ¶5.  The South African Reserve Bank (SARB) would rather 
 have inflation closer to 6 percent, rather than fall below 
 3 percent, according to Coronation Fund Managers. 
 According to the SARB's Deputy Governor Ian Plenderleith, 
 the bank does not want CPIX inflation (which excludes 
 mortgage interest rates) to fall below 3 percent, the 
 bottom of the bank's inflation target.  Plenderleith said 
 the Monetary Policy Committee (MPC) had been concerned 
 that high oil prices would dampen consumer demand, so it 
 relieved the pressure by dropping interest rates by 50 
 basis points on April 14.  However the MPC would monitor 
 the second-round effects of high oil prices to see if it 
 might have to increase rates in the future.  Source: 
 Business Report, April 20. 
 
 CHINA, SOUTH AFRICA SEEK MIDDLE GROUND ON INCREASE IN 
 IMPORTS 
 --------------------------------------------- -------- 
 
 ¶6.  According to China's Ambassador to South Africa, Lu 
 Qiutian, it is up to South African and Chinese policy 
 makers to find solutions to problems associated with the 
 surge of imports.  As a result of a large increase in 
 Chinese imports, thousands of jobs have been lost in the 
 labor-intensive textile and footwear industries.  Trade 
 unions and manufacturers have called on the government to 
 introduce protectionist measures to stem the inflow of 
 goods.  Lu said free trade was an important instrument in 
 bringing prosperity and economic development, and his 
 country was in full support of efforts by the World Trade 
 Organization to open markets.  The South African 
 government has indicated that it intends to negotiate a 
 trade agreement to gain preferential access for South 
 African exporters to the $1.65 trillion (R10.36 trillion) 
 Chinese economy before the end of this year.  Talks will 
 also be opened with India, which has a gross domestic 
 product of $650 billion.  Source:  Business Report, April 
 ¶20. 
 
 TELKOM FEES HINDERING SOUTH AFRICAN GROWTH 
 ------------------------------------------ 
 
 ¶7.  Research by Genesis Analytics about the cost of 
 telecommunications services has confirmed that in some 
 services, Telkom's fees are 400 percent above costs in 
 other countries, serving as a hindrance to higher South 
 African growth.  The South Africa Foundation, which 
 represents about 15 multinationals trading in South 
 Africa, shows that the fees imposed on Telkom's 
 international leased lines are 400 percent higher than the 
 average price from 14 comparable countries and three times 
 higher than the 2nd most expensive country.  Table 1 
 compares South African costs of selected telecommunication 
 services.  Source:  Business Day, April 21. 
Table 1 
                                        Ranking (how 
                                        expensive) 
                                        Number of times more 
                                        expensive than 
                                        cheapest price 
Business ADSL                              Most expensive 
                                        9.3 
Domestic leased line                    Most expensive 
                                        14.7 
International leased line               Most expensive 
                                        31.4 
Retail ADSL                                Most expensive 
                                        8 
ISP Fees                                   Fourth 
                                        5.1 
Business (local calls)                  Most expensive 
                                        10.7 
Business (international calls) Fifth         3.3 
Business (mobile calls)                 Second 
                                        22.7 
Retail (local calls)                    Fourth 
                                        7.9 
Retail (mobile calls)                   Fifth 
                                        10.7 
 
                                        Per cent greater 
                                        than average price 
Business ADSL               147.7% 
Domestic leased line        101.5% 
International leased line   398.6% 
Retail ADSL                 139.2% 
ISP Fees                    43.5% 
Business-local calls        198.5% 
Business-international calls-13.6% 
Business-mobile calls       106.6% 
Retail-local calls          79.3% 
Retail-mobile calls         37.2% 
 
 
FRAZER