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UNCLAS SECTION 01 OF 04 PRETORIA 002942 
 
SIPDIS 
 
DEPT FOR AF/S/KGAITHER; 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 
          July 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: 
 -  BER Predicts 4.2% Economic Growth; 
 -  Weak Rand, Foreign Investors Lift JSE to Record High; 
 -  Reserve Bank Seals $1.5 Billion Loan Deal; 
 -  South African Airways Flights Cancelled as Strike 
 Begins; 
 -  Pepsi Returns to SA; 
 -  SABMiller To Become World's Third-Largest Brewer; 
 -  Mboweni Outlines Monetary Union Based on Rand and Pula; 
 -  Top-level Talks on Life Insurance Rulings; 
 -  ICASA Forces Telkom to Cut Charges; 
 -  Manufacturing Production Declined Sharply in May; 
 -  Real Building Plans Rose by 60.3% in May; and 
 -  Cement Sales up 10.3% in First Half of 2005. 
End Summary. 
 
BER Predicts 4.2% Economic Growth 
--------------------------------- 
¶2. Low interest rates, strong domestic spending and a 
possible recovery in the export sector are likely to spur 
economic growth to 4.2% this year.  Data released by the 
Bureau for Economic Research (BER) shows that gross domestic 
product (GDP) growth, which accelerated to 3.7% last year, 
is expected to rise in line with the government forecast of 
4.3%.  Bureau Chief Economist Pieter Laubscher warned, 
however, that an uncertain international environment, 
including terrorism, oil price volatility, and U.S. dollar 
and interest rate uncertainty clouded the outlook. 
Domestically, South Africa's current account deficit and 
currency volatility remain a concern.  The current deficit 
stood at 3.8% of GDP in the first quarter of this year.  BER 
sees the economy growing at 3.9% next year, but a sharper 
than expected increase in domestic interest rates and weaker 
global economic growth could produce a more pronounced 
domestic economic slowdown in 2006.  BER forecasts that 
while the rand may strengthen to R6.50 to the dollar, the 
rand is likely to weaken to R7.50 next year due to weaker 
commodity prices, higher international interest rates, and a 
wider current account deficit in South Africa.  Source: 
Business Day, July 22. 
 
Weak Rand, Foreign Investors Lift JSE to Record High 
--------------------------------------------- ------- 
 
¶3. The JSE Securities Exchange raced to another record high, 
buoyed by a weaker rand and increased demand from foreign 
investors.  The all-share index topped out at 14,820.24 on 
July 14 before closing at 14,779.75.  Rumors that Citigroup 
was interested in acquiring FirstRand's local bank, First 
National Bank (FNB), also helped propel the local bourse 
higher.  When the rumor broke out on July 12, FirstRand's 
stock gained 5.8% to R15.05 before closing at R14.90. 
FirstRand's CEO Laurie Dippenaar confirmed there had been 
talks with Citigroup as well as HSBC and Standard Chartered. 
Analysts said they were optimistic about the prospects for 
the JSE, which has gained 16% in the year to date, and said 
equities remained the favored asset class in the long term. 
Economist Colen Garrow said that foreign buying accounted 
for almost R30 billion ($4.6 billion) so far this year. 
Last year, foreigners bought R38 billion ($5.8 billion) in 
JSE listed shares.  Source: Business Day, July 15. 
 
Reserve Bank Seals $1.5 Billion Loan Deal 
----------------------------------------- 
 
¶4. The South African Reserve Bank has concluded a $1.5 
billion dual-term loan which allows it to repay existing 
debt at lower interest cost.  According to Reserve Bank 
Governor Tito Mboweni, SARB's loan was oversubscribed and 
drew participation from more than 30 banks across the globe. 
Tranche A is $1 billion with a three-year maturity and a 
margin of 22.5 basis points over LIBOR (the London Inter- 
Bank Offered Rate).  Tranche B is for $0.5 billion with a 
five-year maturity and a margin of 30 basis points over 
LIBOR.  "South Africa's attractiveness as a borrower is 
reflected by the Moody's ratings upgrade in January this 
year," said Mboweni.  Rating agency Moody's upgraded South 
Africa's credit rating from Baa2 to Baa1 with a stable 
outlook, primarily based on the "strengthening" in the 
country's foreign reserves position.  The 24 mandated lead 
arrangers (including Deutsche Bank, JP Morgan, and 
Citigroup) initially committed $62.5 million each, but later 
scaled back their commitment to $56 million.  Source: 
Business Day, July 19. 
 
South African Airways Flights Cancelled as Strike Begins 
--------------------------------------------- ----------- 
 
¶5. All South African Airways (SAA) flights leaving from 
Johannesburg and Cape Town International Airports were 
grounded Friday morning (July 22) as the airline's employees 
embarked on a nationwide strike.  Extremely long queues 
formed at the domestic departures section of the 
Johannesburg International Airport as a strike by ground 
staff and cabin crew kicked off.  Apologetic SAA managers 
were walking up and down the queue explaining that the 
strike was causing "chaos."  Police were on standby, close 
to the queues, but were not expecting any serious problems. 
No crowds had gathered to picket at the airport.  United 
Association of South Africa (Uasa) said thousands of its 
members would take part in the strike following a deadlock 
in pay negotiations.  Uasa is the largest representative 
union of ground staff and cabin crew at SAA.  It was not yet 
clear whether members of fellow trade union, the South 
Africa Transport and Allied Workers Union (SATAWU), were 
also on strike.  Both unions demand an 8% increase while SAA 
is offering 5%.  Source: Business Day, July 22. 
 
Pepsi Returns to SA 
------------------- 
 
¶6. A South African cola war is on the verge of breaking out 
again with PepsiCo International's decision to enter the 
local market for a third time.  PepsiCo tried to return in 
the 1990s, but, its partner, black empowerment company New 
Age Beverages, went bankrupt owing PepsiCo $100 million.  On 
July 20, PepsiCo signed an agreement with beverage giant 
Pioneer Foods that should result in Pepsi products finding 
their way onto retail store shelves by December.  Under the 
agreement, the Pioneer beverage subsidiary, Ceres Fruit 
Juices, will bottle and distribute the PepsiCo soft-drinks, 
including Pepsi, Diet Pepsi, 7-Up, and Mirinda.  Pioneer 
produces more than 60 South African household foods and 
beverage brands.  Rival Coca-Cola supplied the South African 
market through Swaziland during apartheid and has  secured 
an 80% market share.  Source: Business Day, July 21. 
 
SABMiller To Become World's Third-Largest Brewer 
--------------------------------------------- --- 
 
¶7. The owners of South America's No. 2 brewer, Bavaria SA, 
agreed to a $7.8 billion stock swap and cash deal with 
SABMiller that will create the third-largest brewer in the 
world by volume and profit, behind InBev and Anheuser Busch. 
SABMiller said it was buying a 71.8% stake in Colombia-based 
Bavaria from the Santo Domingo family by issuing 225 million 
shares worth about $3.5 billion.  SABMiller will also pay 
about $2 billion in cash and take on Bavaria's debt of $2 
billion.  After the announcement, SABMiller shares, which 
had fallen in anticipation of a costly deal, were up 10.6% 
in London.  In Johannesburg, the stock was up 10.2% at a new 
high of R114.5.  SABMiller, which brews Miller, Castle, and 
Peroni beers, said the combined group would have annual beer 
volumes of about 175 million hectolitres and proforma 
aggregated net revenues of about $12.5 billion.  Source: 
Business Day, July 19. 
 
Mboweni Outlines Monetary Union Based on Rand and Pula 
--------------------------------------------- --------- 
 
¶8. On July 12, Reserve Bank Governor Tito Mboweni floated 
plans for a monetary union among the members of the Southern 
African Development Community (SADC) that would be based on 
the South African rand and the Botswana pula.  The 13-member 
SADC bloc has agreed to create a common currency and a 
regional central bank by 2016.  African Harvest Fund 
Managers Chief Economist Adenaan Hardien said such a 
monetary union would require a common interest rate and 
harmonized fiscal policies, which could be problematic -- 
"as some of the European Union countries are finding out." 
Furthermore, SADC economies were at different stages of 
development, so a one-size-fits-all monetary policy could 
present problems, Hardien said.  Mboweni argued that it 
would make sense for the common monetary area of South 
Africa, Lesotho, Swaziland and Namibia to form the basis of 
a regional central bank, which could then invite other SADC 
member states to join.  The SADC consists of South Africa, 
Angola, Botswana, the Democratic Republic of Congo, Lesotho, 
Malawi, Mauritius, Mozambique, Namibia, Swaziland, Tanzania, 
Zambia and Zimbabwe.  Source: Business Day, July 13. 
 
Top-level Talks on Life Insurance Rulings 
----------------------------------------- 
 
¶9. The Financial Services Board (FSB) and the Life Offices 
Association (LOA) held the first of a series of private 
meetings as tension mounted between life insurers and the 
pension funds adjudicator.  Adjudicator Vuyani Ngalwana has 
issued a spate of rulings over the past three months, 
hammering the life insurance companies for poor disclosure 
of costs they levy on retirement annuities.  No details have 
emerged as the meetings were deemed "private."  Newly 
appointed FSB head Rob Barrow declined to comment on the 
outcome.  This meeting came after the association, an 
industry body representing life insurers, called on the FSB 
as the regulator of the insurance sector to take urgent 
action to resolve the looming crisis in the industry.  As 
the regulator governing the industry, the FSB regulates the 
capital adequacy requirements of life insurers, but it does 
not regulate product and costs.  The life insurance 
companies have appealed against a number of Ngalwana's 
rulings, and the parties could decide on what steps to take 
only after the high court had given judgment.  It is 
estimated that retirement annuities account for between 5% 
and 25% of a typical life insurer's liabilities -- making it 
an important leg of their business.  Source: Business Day, 
July 19. 
 
ICASA Forces Telkom to Cut Charges 
---------------------------------- 
 
¶10. The Independent Communications Authority of South Africa 
(ICASA) obtained government approval last week to cap 
Telkom's price increases at 3.5% below inflation.  The new 
pricing cap is tougher than a previous price-rise limit of 
1.5% below inflation.  Telkom will cut the prices of some of 
its services to comply with a regulator ruling capping its 
overall rate of increase, spokesman Xolisa Vapi said.  Vapi 
did not say, however, which services would see lower 
tariffs.  Telkom's new prices, submitted to government in 
response to ICASA's ruling, are likely to be announced as 
early as July 25.  Telkom has been criticized for charging 
too much for calls, Internet access, stalling the roll-out 
of phone lines and inflating the cost of doing business in 
South Africa.  Deputy Communications Minister Roy Padayachie 
said at a meeting on telecommunications pricing that call 
costs were one of the main barriers to foreign direct 
investment and growth.  Government has been chipping away at 
Telkom's monopoly with new laws that let value-added network 
operators offer cheaper calls over the Internet.  However, 
the Department of Communications has been accused of 
dragging its feet over the launch of a second network 
operator and critics say Telkom continues to dominate the 
market and rip off customers.  Telkom has slashed the cost 
of international calls in recent months, as well as prices 
for high-speed Internet access, but has offset this by 
increasing local call tariffs and rental and connection 
fees.  Source: Business Day, July 18. 
 
¶11. Comment: Based on a July 18 discussion document, ICASA 
is also set to probe high mobile phone charges.  Competition 
between the three mobile network operators (Cell C, Vodacom, 
and MTN) has failed to bring their tariffs down to an 
acceptable level and the regulatory authority may impose a 
one-off reduction in the fees or introduce more stringent 
pricing policies.  End Comment. 
 
Manufacturing Production Declined Sharply in May 
--------------------------------------------- --- 
 
¶12. Manufacturing output fell by 2.6% on a seasonally 
adjusted basis during May following strong growth in 
previous months.  Production of furniture, food and 
beverages as well as clothing and textiles fell sharply by 
8.7%, 6.0%, and 4.3%, respectively.  Output of communication 
apparatus and wood and paper products increased by 14.2% and 
0.4%, respectively.  Overall output increased by only 1.7% 
in the three months ending in May compared with the previous 
three months on a seasonally adjusted basis.  Future 
manufacturing output growth is expected to be relatively 
subdued off the high base established in 2004.  Source: 
Nedbank, July 12. 
 
Real Building Plans Rose by 60.3% in May 
---------------------------------------- 
 
¶13. The real value of building plans passed in South Africa 
rose by 60.3% year-on-year (y/y) in May 2005 to a record 
R4.2 billion (all figures constant 2000 rand) compared with 
a 79.4% increase in April 2005 to R3.6 billion, Statistics 
South Africa reported.  This brought the increase for the 
first five months to 47.6%, which is substantially higher 
than last year's upwardly revised 35.2% increase after only 
an 11.3% rise in 2003.  The largest increase in 2004 in the 
value of recorded building plans passed was reported for 
residential buildings (up 41.3%), followed by additions and 
alterations (up 29.0%) and non-residential buildings (up 
23.4%). The 2004 peak increase of 77.6% was set in February. 
January 2004 was the only month last year, where the y/y 
increase did not exceed 20%, while there were four months 
when the y/y increase exceeded 45%.  Source: I-Net Bridge, 
July 20. 
 
Cement Sales up 10.3% in First Half of 2005 
-------------------------------------------- 
 
¶14. South African cement sales for the first half of 2005 
rose by 10.3% year-on-year (y/y) to 5.5 million tons, the 
Cement and Concrete Institute (CNCI) reported.  The increase 
in June was 6.9% y/y of 1.07 million tons after May's 8.1% 
y/y rise of 1.02 million tons after April's large 28% surge 
of 972,000 tons.  Cement sales rose only 2.1% y/y in March 
2005 to 925,000 tons.  Cement sales rose by 17.4% in 2004 to 
a record 10.69 million tons compared with a 7.0% rise in 
¶2003.  Source: I-Net Bridge, July 20. 
 
HARTLEY