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

141120Z Oct 05

UNCLAS SECTION 01 OF 03 PRETORIA 004181 
 
SIPDIS 
 
DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR OAISA/RALYEA/CUSHMAN 
USTR FOR COLEMAN 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT:  SOUTH AFRICA ECONOMIC NEWSLETTER 
           October 14 2005 ISSUE 
 
 
 ¶1. Summary.  Each week, Embassy 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: 
 
 -  Interest Rates Remain Unchanged; 
 -  August Manufacturing Production Rebounds; 
 -  Consumer Confidence Still Strong; 
 -  Cabinet Approves Plan for 6% Growth by 2010; 
 -  Stats SA Plans to Revise Labor Force Survey; and 
 -  Report Highlights Poverty among Black Youth. 
 End Summary. 
 
 INTEREST RATES REMAIN UNCHANGED 
 ------------------------------- 
 
 ¶2.  Citing high oil prices, deteriorating inflationary 
 expectations, and higher global inflation as increasing 
 risks in meeting the 3-6% inflation target, the South 
 African Reserve Bank (SARB) decided to leave interest 
 rates unchanged at the October 12-13 Monetary Policy 
 Committee (MPC) meeting.  A 1.3 percentage point increase 
 in CPIX (consumer prices minus mortgage costs) since the 
 last MPC meeting in August signaled increasing risks of 
 inflation overshooting the 6% ceiling.  Although the 
 impact of substantially higher fuel costs have not yet 
 translated into higher prices in other goods and services, 
 the SARB felt that higher oil prices in the future would 
 pose a significant inflation risk.  August CPIX increased 
 4.8%; while if fuel costs were excluded, CPIX increased by 
 only 3.6 percent.  The SARB also cited the latest 
 inflations expectations survey by the Bureau of Economic 
 Research that indicates inflationary expectations 
 increased 0.3% and 0.4% in 2006 and 2007, respectively, 
 with CPIX inflation expected to reach 5.2% in 2006 and 
 5.4% in 2007.  The SARB views that the deterioration in 
 the inflation outlook cannot be ignored, so the repurchase 
 rate remains at 7% and prime lending rates are at 10.5%. 
 The SARB still expects inflation to remain below the 
 ceiling, with peak inflation occurring during the first 
 two quarters in 2006, at a level just below 6%.  The 
 market consensus expected SARB would not change interest 
 rates during the October MPC meeting.  Source:  IOL; 
 Statement of the Monetary Policy Committee; MPC Alert 
 Standard Bank, October 13. 
 
 ¶3.  Comment.  South African real interest rate is 3.1% 
 (the repurchase rate minus CPI inflation), while the 
 current U.S. real interest rate is 0.15% (federal funds 
 rate at 3.75 and US CPI inflation at 3.6%).  Expectations 
 are that the U.S. will continue to increase interest rates 
 in November.  End Comment. 
 
 AUGUST MANUFACTURING PRODUCTION REBOUNDS 
 ---------------------------------------- 
 
 ¶4.  August manufacturing production grew by 3.5%, up from 
 July's growth of 2.6%, due to strong consumer demand and a 
 weaker rand.  The domestic consumer now buys 80% of 
 manufacturing output, and boosted growth in the 
 manufacturing sector throughout 2004 when South Africa's 
 main trading partner, the European Union experienced 
 slower growth and South Africa's rand strengthened 17%. 
 So far in 2005, the rand has depreciated 14% against the 
 dollar, leading to lower prices of manufactured exports. 
 On a quarterly basis, seven out of the 10 manufacturing 
 sectors reported higher growth ending in July 2005. 
 Quarterly manufacturing production increased by 1.2% 
 (seasonally adjusted), explained primarily by growth in 
 the furniture, motor vehicle, and petroleum sectors.  The 
 motor vehicles sector contributed 0.8 percentage points to 
 the increase in total manufacturing production; petroleum, 
 chemical products, rubber and plastic products accounted 
 for 0.5 percentage points; furniture explained 0.5 
 percentage points.  However, production decreases were 
 reported in the basic iron and steel, non-ferrous metal 
 products, metal products and machinery division (1.2 
 percentage points) and the textiles, clothing, leather and 
 footwear division (0.2 percentage points).  Source: 
 Standard Bank, Manufacturing Unpacked, October 12; 
 Business Day and Business Report, October 13. 
 
 ¶5.  Comment.  Recent leading indicators of manufacturing 
 activity, such as the Bureau of Economic Research's 
 Purchasing Managers' Index, has been trending lower in the 
 recent months from a peak of 60 in July to 55.7 in 
 September.  The number is still above the critical value 
 of 50, which indicates that the sector should still grow 
 in the months ahead.  The manufacturing data just 
 published is the last statistical release based on the 
 sample drawn from the new business register in 2004.  Data 
 for September will be based on a new sample of 
 manufacturing enterprises, which was drawn in August 2005 
 and will take account of the latest developments in South 
 Africa's manufacturing sector.  End comment. 
 
 CONSUMER CONFIDENCE STILL STRONG 
 -------------------------------- 
 ¶6.  Consumer confidence during the third quarter 2005 
 remained unchanged from the previous quarter, reaching 17 
 points, according to the First National Bank (FNB) and the 
 Bureau of Economic Research.  This level is close to the 
 highest level recorded during the second quarter of 2004 
 when it reached 20.  Consumer spending is expected to 
 remain strong for the next year or so, although higher 
 fuel prices could erode household purchasing power to some 
 extent, according to FNB Chief Economist Cees Bruggemans. 
 Low interest rates, consecutive personal tax rate cuts and 
 stable prices of durable and semi-durable goods have 
 strengthened consumers' ability to spend.  Rising oil 
 prices have been the main reason for the rise in CPIX 
 (consumer price index less mortgage costs) although so far 
 only transport costs are affected.  In August, CPIX, the 
 targeted measure of inflation, rose to 4.8% and is 
 expected to peak at around 5.5% in the first quarter of 
 ¶2006.  From June to August, when the third quarter 
 confidence index survey was conducted, the petrol price 
 increased 54 rand cents/liter.  Although higher transport 
 costs and slowing house prices could slow consumers' 
 confidence in next quarter, these were offset by low food 
 prices, and a pick-up in employment on the back of higher 
 economic growth.  Source:  Business Day, October 13. 
 
 ¶7.  Comment.  The range of consumer confidence index has 
 been from minus 36 to plus 20 over the past 30 years.  The 
 average of the last three months has been at the top of 
 the range. End comment. 
 
 CABINET APPROVES PLAN FOR 6% GROWTH BY 2010 
 ------------------------------------------- 
 
 ¶8.  Cabinet approved a report from Deputy President 
 Phumzile Mlambo-Ngcuka's Economic Growth Task Team, 
 describing South Africa's plans to achieve accelerated 
 growth.  Short on detail, the report forecasted a GDP 
 growth rate of 4.5% in the immediate term, projected to 
 rise to 6% between 2010 and 2014.  The National Treasury 
 projected growth at 4.3% in 2005, although this could be 
 revised upwards when Finance Minister Trevor Manuel 
 delivers his medium-term budget in November.  The South 
 African Reserve Bank and independent economists have said 
 a 4.5% GDP growth rate was feasible in the short term. 
 Government spokesman and Advisor to the President Joel 
 Netshitenzhe cautioned that 6% growth would only be 
 achieved in the medium-to-long term.  Challenges including 
 infrastructure development, sector investment strategies, 
 education and skills development, second economy 
 interventions and improving the capacity of the state to 
 provide economic services had to be addressed.  The 
 private sector would be expected to intensify investment 
 in job-creating sectors.  Government would also try to 
 reform labor markets.  Cabinet also agreed to phase out 
 import parity pricing and to introduce nondiscriminatory 
 pricing in some sectors.  High input costs are identified 
 as one of South Africa's growth blockages, and 
 Netshitenzhe said "further work" would be done to lower 
 the costs of doing business.  Cabinet also recommended 
 focusing government procurement of goods and services to 
 small businesses.  Source:  Business Day October 13. 
 
 STATS SA PLANS TO REVISE LABOR FORCE SURVEY 
 ------------------------------------------- 
 ¶9.  Statistics SA (Stats SA) will introduce a revised 
 model of its labor force survey around 2008, responding to 
 recent criticisms by the International Monetary Fund 
 (IMF).  There has been intense debate about the accuracy 
 of South Africa's unemployment statistics, which range 
 from the official rate of 26% to the broader measure of 
 41%, depending on the definition of unemployed.  Those in 
 favor of a restricted definition, based on those actively 
 seeking work, argue that being without formal-sector 
 employment does not necessarily mean people are without 
 any form of work or income.  Those in favor of an expanded 
 definition of unemployment argue that to exclude the many 
 discouraged job-seekers who have given up hope of finding 
 a job does not give an accurate picture of the extent of 
 unemployment in the country.  The IMF pointed out certain 
 weaknesses in methodology that could lead to inaccuracies 
 in the measurement of employment and unemployment, 
 according to Stats SA's Deputy Director-General of 
 Statistical Support, Liz Gavin.  One of the aims of 
 redesigning the labor market survey would be to 
 differentiate more precisely between types of jobseekers. 
 Source:  Business Day, October 12. 
 
 REPORT HIGHLIGHTS POVERTY AMONG BLACK YOUTH 
 ------------------------------------------- 
 
 ¶10.  A new report by the Human Sciences Research Council 
 highlights the difficulties in escaping poverty by black 
 South Africans aged 18 to 35.  More than two-thirds of 
 black South Africans in this age group are unemployed and 
 more than two-thirds of young people who took part in the 
 survey had never had the opportunity to work.  There was a 
 correlation between education and employment, 33% of those 
 with secondary and 5.1% of those with tertiary 
 qualifications were unemployed.  Almost half of the black 
 youths who were not studying did not have the financial 
 means to continue their studies.  The average number of 
 years taken to finish school was 60% higher than the 
 standard 12 years because many pupils were forced to 
 repeat grades or drop out of school.  The report found 
 that personal contacts and networks remained a determining 
 factor in youth finding first employment.  A third said 
 they found their first job through personal contacts, and 
 just 15% got a job through sending out their details. 
 Source:  Business Day, October 12. 
 
TEITELBAUM