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 004367 
 
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 28 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: 
 
 -  Medium Term Budget:  Infrastructure Spending to Spur 
 Over 4% Growth; 
 -  September Consumer Prices Increase Due to Transport 
 Costs; 
 -  September Producer Price Inflation Higher; 
 -  Increased Investment in COEGA; 
 -  Signs of Cooling in Housing Market; 
 -  Large Provincial Differences in Housing Affordability; 
 and 
 -  Savings Crucial to 6% Growth. 
 End Summary. 
 
 MEDIUM TERM BUDGET:  INFRASTRUCTURE SPENDING TO SPUR OVER 
 4% GROWTH 
 --------------------------------------------- ------------- 
 
 ¶2.  Finance Minister Trevor Manuel's Medium Term Budget 
 Policy statement (MTBPS) forecasted steady growth above 
 4%, low inflation, low budget deficits for 2006 through 
 2008, and increased government expenditures on 
 infrastructure and social services.  GDP growth should 
 reach 4.4%, 4.3%, 4.4% and 4.8% from 2005 through 2008. 
 Peaking in 2006 at 5.2%, targeted consumer price inflation 
 (consumer prices excluding mortgage costs) should recede 
 to 4.8% and 4.5% in 2007 and 2008, respectively, still 
 within the 3-6% range.  In 2004, the budget deficit to GDP 
 ratio should reach -1% (compared to a forecasted -3.1% 
 made last February), and will average -2.1% over the next 
 three years.  So far, approximately R30 billion ($4.6 
 billion using 6.5 rands per dollar) extra in tax revenue 
 has been collected this year, and government's spending on 
 infrastructure and transport initiatives will rise. 
 Reinforcement of existing social priorities of health, 
 education and housing will also occur.  Government capital 
 spending will rise over the next three years, with public 
 sector capital formation as a percent of GDP reaching 6.7% 
 in 2008/09 from its current level of 5.6%.  The current 
 account deficit remains high.  The current account deficit 
 as a percent of GDP remains above its 2005 estimate of - 
 3.5%, and is estimated to reach -4.1% by 2008.  In 
 addition, foreign exchange restrictions are gradually 
 being relaxed.  Manuel announced relaxing foreign currency 
 investments to 25% of total retail assets from 20% for 
 unit trusts and 15% for investment companies.  South 
 African banks will be able to lend foreign currency 
 denominated instruments to South African companies and 3% 
 of their total assets or 40% of their regulatory capital 
 offshore without South African Reserve Bank approval. 
 Source:  Business Report, Business Day, October 26; MTEF 
 Alert, Standard Bank, October 25. 
 
 SEPTEMBER CONSUMER PRICES INCREASE DUE TO TRANSPORT COSTS 
 --------------------------------------------- ------------ 
 
 ¶3.  Consumer prices continue to reflect higher transport 
 prices, although second-round inflationary pressures are 
 not yet shown in September's inflation.  Consumer prices 
 increased by 4.4% in September from August's 3.9% and CPIX 
 (consumer prices excluding mortgage costs) rose by 4.7% 
 compared to August's 4.8% increase.  Most market forecasts 
 expected CPIX to rise 5% in September.  September's food 
 prices increased more than in August; however, this was 
 not the case for core CPI, which excludes the most 
 volatile food prices.  Core CPI increased by 5% in 
 September, slightly lower than August's 5.1% rise.  Other 
 price categories showed little monthly increases.  As a 
 result, there is little evidence of price feed-through 
 effects of higher oil prices.  Recent statements by the 
 Governor of the South African Reserve Bank, Tito Mboweni, 
 indicated that the SARB intends to remain `ahead of the 
 curve' in increasing interest rates to curb second-round 
 inflationary impacts of the rise in oil prices.  Source: 
 Standard Bank, CPI Alert; StatsSA Publication P0141.1, 
 October 26. 
 
 SEPTEMBER PRODUCER PRICE INFLATION HIGHER 
 ----------------------------------------- 
 
 ¶4.  September producer prices rose 4.6% from last month's 
 4.2% increase, slightly lower than the consensus forecast 
 of 4.7%.  The seasonal monthly decline of 28.4% in 
 electricity prices explains the lower than expected 
 September producer price inflation.  Increases in 
 agricultural, mining and quarrying prices were the largest 
 monthly contributors towards increased inflation, although 
 the decline in electricity prices outweighed these two 
 sectors.  Manufacturing inflation, accounting for 80% of 
 the total producer price index, rose by 0.3% m/m in 
 September compared to 0.4% during August.  The continued 
 absence of second-round inflationary pressures of oil 
 prices at the producer level is an indication of subdued 
 consumer inflation.  Continuing drought conditions serve 
 as a source of worry towards future food price inflation. 
 September's agricultural prices did show a substantial 
 increase; however, next month's results should indicate 
 whether agriculture and oil prices should be a source of 
 inflationary concern.  Source:  Standard Bank, PPI Alert; 
 Stats SA P0142.1, October 27. 
 
 INCREASED INVESTMENT IN COEGA 
 ----------------------------- 
 
 ¶5.  The Coega Industrial Development Zone announced its 
 third major investor in the past five months, boosting the 
 chances of financial success for the industrial 
 development zone established in 1996.  Straits Chemicals, 
 a consortium composed of Malaysians, British, Singaporean 
 and South African investors, announced a R1.1 billion 
 ($170 million) investment project to build a chlorine 
 refinery and water desalinization plant.  In May 2005, 
 Sanger International Textiles was Coega's first major 
 participant, planning to invest R200 million ($30 million) 
 in a weaving mill, followed by a R1.6 billion ($250 
 million) investment by German company Ferrostaal to build 
 a steel mill.  Within the past five months, COEGA has 
 secured R2.9 billion ($450 million) of investment, 
 approximately 75% of the R4 billion cost to the South 
 African government.  Source:  Business Report, October 26. 
 
 SIGNS OF COOLING IN HOUSING MARKET 
 ---------------------------------- 
 
 ¶6.  The latest First National Bank (FNB) residential 
 barometer showed increasing signs of a weakening property 
 market, although mainly for higher priced residential 
 properties.  In the third quarter 2005, 48% of sellers 
 failed to obtain their asking price, compared to 43% a 
 year ago, and the average length of time properties 
 remained on the market increased to eight weeks from five 
 weeks at the beginning of 2005.  Roughly 75% of sellers in 
 the lower-priced market were receiving their asking price 
 in the third quarter 2005 compared with 43% in the upper- 
 priced market.  The lower-priced market is between 
 R180,000 ($28,000) and R350,000 ($54,000), the middle- 
 priced market between R350,000 ($54,000) and R750,000 
 ($115,000), and the upper-priced market between R750,000 
 ($115,000) and R2.5 million ($385,000).  Properties bought 
 for investment purposes had declined to 18% in the third 
 quarter from 25% in the second quarter 2005.  FNB's 
 residential property confidence indicator, which records 
 the level of activity in the market, declined to 6.1 in 
 the third quarter 2005, which is the lowest level recorded 
 since the start of the FNB residential property barometer 
 18 months ago.  The South African housing market usually 
 slows right before the holiday season, so lower activity 
 level was expected.  Source:  Business Report, October 27. 
 
 LARGE PROVINCIAL DIFFERENCES IN HOUSING AFFORDABILITY 
 --------------------------------------------- -------- 
 
 ¶7.  The residential property market has showed relatively 
 strong growth in all the provinces and metropolitan 
 regions in recent years, but the rate of growth in 
 household income and housing prices has varied by region, 
 according to ABSA bank senior economist Jacques du Toit. 
 The potential size of the 2004 South African housing 
 market was relatively small, about 1.8 million households, 
 or 14.4% of a total number of 12.4 million households in 
 ¶2004.  The housing market is determined by the number and 
 percentage of households in a position to afford a house 
 of 80 square meters in the middle priced housing market. 
 This small percentage is due to a skewed distribution of 
 household income in 2004, with a large percentage of 
 households earning relatively low levels of income. 
 Gauteng province had the highest level of income per 
 household and the largest percentage of households able to 
 buy a house, while the Eastern Cape had the smallest 
 percentage.  Johannesburg North and West were the major 
 metropolitan areas with the highest percentage of 
 households able to afford to buy a house in 2004, followed 
 by Pretoria.  Cape Town was the metropolitan area with the 
 smallest proportion.  In 2000, the ratio of house prices 
 to household income in South Africa was 4.5.  This ratio 
 increased to 7.2 in 2004 and rose to significantly higher 
 levels in the Eastern Cape (10.6) and Limpopo (8.3). 
 Housing in these provinces has become much less affordable 
 than in provinces such as Gauteng and the Western Cape, 
 which have relatively high levels of housing prices and 
 household income.  Source:  I-Net Bridge, October 27. 
 
 SAVINGS CRUCIAL TO 6% GROWTH 
 ---------------------------- 
 
 ¶8.  Old Mutual Asset Managers economist Rian le Roux cites 
 low domestic savings as a possible constraint to achieving 
 South Africa's 6% growth goal.  Roughly one in every nine 
 South Africans saves, either by putting money in the bank 
 or by putting it away for their retirement.  Le Roux noted 
 that no mention was made of the low domestic savings rate 
 even though National Treasury's Medium Term Budget Policy 
 statement outlined the government's plans to spend at 
 least R165 billion ($25 billion) on infrastructure over 
 five years, sector investment strategies, education and 
 skills development and the improvement of service 
 delivery.  While companies continue to be the largest 
 contributors to savings in the South Africa, household 
 savings have declined.  There is a gap between savings and 
 fixed investment, with gross savings at 14.5 percent of 
 GDP and fixed investment at about 16 percent.  Le Roux 
 said savings would have to rise to match the rise in gross 
 domestic fixed investment if South Africa was to attain 
 higher growth.  Source:  Business Report, October 27. 
 
 TEITELBAUM