This record is a partial extract of the original cable. The full text of the original cable is not available.

050954Z Aug 05

UNCLAS SECTION 01 OF 03 PRETORIA 003145 
 
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 
          August 5 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: 
 -  Recent Inflation Trends Bring Poor Economic Relief; 
 -  June's Trade Balance Surplus Eases Concern for Rand; 
 -  South Africa's July PMI Record Increase; 
 -  S&P Upgrades South Africa's Currency; 
 -  Rising Income Creates Potential 1.5 Million Car 
 Consumers; 
 -  July Slowdown in Car Sales Indicates Possible Market 
 Cooling; and 
 -  Growth Pause in Current Trading Conditions. 
 End Summary. 
 
 RECENT INFLATION TRENDS BRING POOR ECONOMIC RELIEF 
 --------------------------------------------- ----- 
 
 ¶2.  Between 1998 and 2004, the average inflation rates 
 have been higher for the rich than for the poor.  This 
 trend, however, looks set to be reversed this year.  Until 
 October 2004, there were only two periods when prices were 
 rising faster or at the same pace for the country's upper 
 expenditure category.  The two rates converged in July 
 2001 but then for more than three years the very low 
 expenditure group experienced higher inflation, largely 
 because of the rand's weakness and food prices increased 
 disproportionately more than other goods.  In January 
 2002, annual inflation for the lowest income bracket was 
 9.1 percent versus 4.1 percent for the most affluent 
 group.  The past two years have shown substantial recovery 
 in the rand, which appreciated 140 percent against the 
 dollar between 2002 and 2004.  In 2005, the rand has shown 
 recent weakness, depreciating 14 percent against the 
 dollar so far, although the depreciation has been mild 
 compared to 2002.  In June 2005, inflation for the very 
 low expenditure group was 1.5 percent (y/y) while 
 inflation for the high expenditure group reached 2.7 
 percent.  Lower food prices explain the much of the 
 differential in inflation among expenditure groups.  The 
 very poor have seen a real increase in wealth.  In 2005, 
 the child welfare and old age grants increased by 5.9 
 percent and 5.4 percent respectively, substantially above 
 their inflation rate.  Higher fuel prices also helped 
 explain the difference in inflation rates as higher income 
 groups tend to own vehicles and consume petrol.  Policies 
 of government such as inflation targeting and welfare 
 spending may begin to bring modest relief to South 
 Africa's poor.  The robust rand, however, is also blamed 
 for job losses that take their biggest toll on those at 
 the low end of the income scale.  Employment numbers from 
 the latest March 2005 Labor Force Survey show that the 
 South African economy created 500,000 new jobs from March 
 ¶2004.  Many of the new jobs are in services, retail and 
 construction, which have benefited from lower interest 
 rates.  While inflation is generally lower for all income 
 groups, the poor seem to be doing better, with price 
 increases for lower income groups falling behind welfare 
 increases.  Statistics SA has only released consumer 
 inflation by income, ranging from very low to very high- 
 expenditure groups, since 1997.  Source:  Business Day, 
 August 1. 
 
 JUNE'S TRADE BALANCE EASES CONCERN FOR RAND 
 ------------------------------------------- 
 
 ¶3.  June's trade balance showed a surplus of R1.3 billion, 
 in contrast to May's R2.8 billion deficit, according to 
 the latest figures released by the South African Revenue 
 Service (SARS).  Economists polled by Reuters expected a 
 trade deficit of about R1.2 billion in June.  The latest 
 trade figures also improved the outlook for the rand and 
 interest rates, because of their implications for the 
 current account.  A large deficit on the current account, 
 amounting to 3.8 percent of GDP in the first quarter, has 
 been worrying since it could lead to a weaker rand and 
 higher inflation.  An 8.3 percent monthly increase in the 
 value of exports explained June's surplus as the value of 
 imports declined by 5.8 percent.  Despite this, the 
 balance for the year to date remains considerably worse 
 than at the same period last year, with a R6.7 billion 
 deficit compared with a R2.1 billion shortfall in 2004. 
 Source:  Business Day and Business Report, August 1. 
 SOUTH AFRICA'S JULY PMI RECORD INCREASE 
 --------------------------------------- 
 
 ¶4.  South Africa's Purchasing Managers' Index (PMI) 
 increased to an all-time high at 61.7 compared to June's 
 59.8, as a weaker currency boosted sales orders, but it 
 was too early to call it a recovery for the manufacturing 
 sector.  Investec Asset Management head of fixed income 
 Andre Roux said the jump in the index was unexpected and 
 more readings at higher levels in subsequent months would 
 confirm a recovery in manufacturing conditions.  The 
 previous record of 60.3 was set in April 2002.  South 
 Africa's manufacturing sector contracted by 1.9 percent in 
 the first quarter of 2005, for the first time since 2003, 
 largely hurt by the strong rand. Manufacturing constitutes 
 more than 16 percent of GDP.  The rand has depreciated by 
 almost 14 percent against the dollar so far this year, but 
 the trend has only put a small reversal into three years 
 of straight gains, which have eroded exports.  However, 
 June's exports do show recent gains.  The July PMI 
 increase was driven by a strong showing in two of the 
 PMI's eight sub-indices, measuring business activity and 
 new sales orders.  New sales orders climbed to 69 in July 
 from 66.3 in June.  Business activity jumped to 69.9 from 
 60.3 in June. However, other sub-indices such as 
 inventories, suppliers' performance and employment gave up 
 some of their June gains.  The seasonally adjusted 
 employment index slipped back to 50.1 after rising to 
 53.3, but Roux did not believe this began a reversal of an 
 upward trend.   If the PMI reading was corroborated in 
 next week's manufacturing production figures for June from 
 Statistics SA, the release of which coincides with a 
 meeting of the Reserve Bank's Monetary Policy Committee, 
 it might indicate that a manufacturing recovery has 
 started.  Source:  Reuters and Business Day, August 2. 
 
 S&P UPGRADES SOUTH AFRICA'S CURRENCY 
 ------------------------------------ 
 
 ¶5.  International ratings agency Standard & Poor's (S&P) 
 has upgraded South Africa's long-term foreign currency 
 rating from triple B to triple B plus, putting it three 
 levels above the entry-level investment grade rating and 
 bringing South Africa to within one notch of the A 
 category.  South Africa's foreign rating is now equal to 
 Poland and Thailand and is one notch ahead of Mexico. 
 S&P's upgrade, prompted by South Africa's stronger 
 economic growth prospects and reduced vulnerability to 
 external shocks, comes after Moody's, a rival ratings 
 firm, upgraded South Africa's credit rating in January 
 ¶2005.  The third of the big rating agencies, Fitch, has 
 put South Africa on positive ratings watch, indicating an 
 upgrade could come later this year.  Sovereign credit 
 ratings are a measure of a government's creditworthiness, 
 a higher rating implies less risk for investors, so they 
 will be willing to accept lower yields on that 
 government's debt, making it cheaper for the country and 
 its corporations to borrow on local and international 
 markets.  S&P credit analysts are confident that South 
 Africa's economic growth prospects for this year are even 
 better than last year's, expecting the budget deficit to 
 remain within the government's medium-term target of 3 
 percent of GDP and the general government debt stable at 
 40 percent of GDP.  Although government's record of 
 economic policy management was very good, there were still 
 problems in delivery.  S&P remains concerned about 
 unemployment, poverty and income disparity, citing these 
 as negative comparisons against its peers.   S&P has 
 upgraded South Africa's debt rating four times in the past 
 10 years.  Source:  Business Day and Business Report, 
 August 2, 2005. 
 
 RISING INCOME CREATES POTENTIAL 1.5 MILLION BLACK CAR 
 CONSUMERS 
 --------------------------------------------- -------- 
 
 ¶6.  According to a Merrill Lynch research report, there is 
 a potential market of 1.5 million used and new car black 
 consumers due to rising income levels.  Providing vehicle 
 finance for households with gross incomes of just over 
 R5000 per month ($770 using 6.5 rands per dollar) and 
 allowing private leasing could broaden the potential pool 
 of vehicle owners.  Only 24 percent of people earning 
 between R4000 ($600) and R5999 ($900) per month owned cars 
 according to the South African Advertising Research 
 Foundation.  The report showed that a pretax salary of 
 R5700 a month ($880) would allow someone to buy a used car 
 of about R70,000 ($11,000), and R9000 a month ($1400) 
 would allow someone to buy a new car for about R110,000 
 ($17,000) financed over 54 months.  Even if the gross 
 household salary was as low as R5,200 ($800), an 
 "innovative" bank could finance the purchase of a vehicle. 
 Private leasing could add a further 327,000 potential car 
 buyers to the market.  Affordability, or the price of cars 
 relative to people's salaries, was also more of a problem 
 in South Africa than in other countries, even though cars 
 became more affordable between 2003 and 2004, the Merrill 
 Lynch report said.  While the report expected car sales to 
 slow due to the rise in interest rates it foresaw next 
 year, and the resulting lower disposable income, long-term 
 vehicle-sales growth should remain strong.  The small 
 number of car owners, rising income levels and the poor 
 public-transport infrastructure would support vehicle- 
 sales growth of between 6 percent and 12 percent a year 
 for the next five years.  Merrill Lynch also warned that a 
 rise in gasoline prices could derail the positive outlook 
 for the vehicle industry.  (Business Day, August 2). 
 
 ¶7.  Comment.  South Africa's car producers are dependent 
 on local sales as well as exports.  Car production 
 accounts for 7.1 percent of South Africa's economy, making 
 it larger than mining.  South Africa produces less than 1 
 percent of the global yearly car output. End Comment. 
 
 JULY SLOWDOWN IN CAR SALES INDICATE POSSIBLE MARKET 
 COOLING 
 --------------------------------------------- ------ 
 
 ¶8.  The first signs that South Africa's car sales market 
 may be cooling emerged with the release of the latest 
 vehicle sales figures, which showed a 6 percent month-on- 
 month decline.  However, year-on-year sales by National 
 Association of Automobile Manufacturers of South Africa 
 (NAAMSA) members rose 19.4 percent in July compared with 
 July 2004, slightly below the growth level of about 20 
 percent that South African car manufacturers have 
 experienced in the past few months.  Economists said that 
 the slowdown was in line with expectations of a gradual 
 slowdown to continue for the rest of 2005.  New vehicle 
 sales showed strong growth in July, reaching 26.5 percent. 
 Ford Motor Company asserted that the market was just 
 starting to cool, with daily passenger car sales slowing 
 to 1,473 in July, compared with 1,530 in June.  Other car 
 manufacturers also noticed a leveling of July sales, 
 although production and stock constraints rather than 
 softening consumer demand were cited as reasons.  Source: 
 Business Day, August 3. 
 
 GROWTH PAUSE IN CURRENT TRADING CONDITIONS 
 ------------------------------------------ 
 
 ¶9.  July's South African current trading conditions 
 continue to slow, similar to June's trend, although 
 expectations for the next six months remain high.  The 
 South African Trade Management Indices (SATMI) consists of 
 two trading indices designed to capture current and future 
 (next six months) trading environments.  In May 2005, 
 current trading conditions reached year-to-date highs and 
 the past two months have seen steady declines, with new 
 orders showing the largest declines.  July's trade 
 activity index reached 47, compared to June's 49.  Monthly 
 expectations about future trading conditions have remained 
 relatively high (over 60) throughout 2005, unchanged from 
 the past two months (June and July).  Source:  Standard 
 Bank, SATMI, August 4. 
 
 ¶10.  Comment.  Standard Bank publishes the monthly survey 
 consisting of South African Chamber of Business members. 
 The threshold value of the index is 50; when above this 
 level, trading conditions are seen to have improved 
 relative to the previous month, when below, trading 
 conditions have deteriorated.  End comment. 
 
 FRAZER