VZCZCXRO9932
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #4829/01 3431129
ZNR UUUUU ZZH
R 091129Z DEC 05
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0415
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 PRETORIA 004829 
 
SIPDIS 
 
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 December 9 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; 
 -  October Manufacturing Growth Slows to 0.3%; 
 -  Moderate House Price Growth Continues; 
 -  South Africans Abroad Keep Contacts; 
 -  Business Confidence Still High; 
 -  South African Teacher Shortage Looms; 
 -  Competition Commission Found Higher Car Prices but no 
 Legal Case; and 
 -  SA Wants to be Africa's Services Hub but Finds High IT 
 Costs a Barrier; 
 End Summary. 
 
 Interest Rates Remain Unchanged 
 ------------------------------- 
 
 ¶2.  Citing improved inflationary outlook, the Monetary 
 Policy Committee (MPC) decided to leave interest rates 
 unchanged, with the repurchase rate remaining at 7%. 
 Inflation excluding mortgage costs (CPIX) has been 
 declining since August 2005, even with substantially 
 higher petroleum prices.  October's CPIX inflation dropped 
 to 4.4% compared to August's inflation of 4.8%.  Food, 
 clothing and furniture prices have shown recent declines 
 and even services inflation have been well within the 3-6% 
 target, with October's growth at 5.2%.  The MPC now 
 expects CPIX to reach 5% by the end of 2007, compared to 
 5.3% at the October MPC meeting.  In addition, 
 inflationary expectations came in lower compared to 
 expectations at the October MPC meeting.  According to the 
 inflation expectations survey conducted by the Bureau for 
 Economic Research (BER), CPIX inflation expectations 
 remain unchanged in 4th quarter 2005 compared to the 
 previous quarter, with inflation expected at 5.2% for both 
 2006 and 2007.  The previous BER survey expected 2007 
 inflation at 5.4%.  The MPC also noted signs of moderating 
 consumer demand, with vehicle sales, manufacturing 
 production, money supply and credit growth all 
 experiencing slowing growth.  The MPC cited an increasing 
 current account deficit as the primary risk, although it 
 noted that so far the deficits have been financed by 
 capital inflows.  Market expectations thought that the MPC 
 would leave interest rates unchanged in December.  Source: 
 Monetary Policy Statement, South African Reserve Bank, 
 December 8; Standard Bank, MPC Alert, December 8. 
 
 October Manufacturing Growth Slows to 0.3% 
 ------------------------------------------ 
 
 ¶3.  Manufacturing growth slowed to an 18-month low of 0.3% 
 (y/y) in October compared to September's growth of 5.6%, 
 according to Statistics SA.  On a monthly basis, 
 manufacturing output fell by 4.9% (seasonally adjusted). 
 Following the latest Investec Purchasing Managers Index 
 (PMI) figures, a leading indicator of manufacturing 
 activity, the outlook for the manufacturing sector remains 
 uncertain in the short term.  PMI declined to 50 index 
 points in November, making it the fourth consecutive month 
 it has declined.  Growth in manufacturing production has 
 been supported by strengthening domestic demand since late 
 2003, but as consumer demand growth flattens, the 
 manufacturing sector is once again exposed to exchange 
 rate risks.  Domestic demand accounts for 80% of the 
 manufacturing market, and there are indications that the 
 strength in consumer spending may be abating.  Borrowing 
 growth slowed to a seven-month low of 19.5% in October as 
 consumers' debt levels increased to a record 62% of 
 disposable income in the second quarter 2005.  The rand 
 has strengthened 9.4% since June 2005, leading to recent 
 export decline of 11% in October.  The manufacturing 
 sector is the 2nd largest in South Africa (after the 
 service sector), accounting for 16% of the economy. 
 Source:  Business Report and Business Day, December 8; 
 Standard Bank, Manufacturing Unpacked, December 7. 
 
 Moderate House Price Growth Continues 
 ------------------------------------- 
 
 ¶4.  According to ABSA, nominal house-price growth reached 
 
PRETORIA 00004829  002 OF 003 
 
 
 14.7% in November, the lowest year-on-year growth since 
 mid-2002, compared to 16.2% in October.  The declining 
 growth trend, which started after house-price growth 
 peaked at 35.5% in October 2004, may allow first-time 
 buyers and middle-income consumers to enter the market. 
 This trend could extend strong residential property demand 
 if interest rates remain stable.  Standard Bank's 
 residential property report for the last quarter 2005 also 
 confirmed a declining house-price growth trend, saying 
 that according to its home-loan database, house prices 
 grew 21.5% from a peak of 35.5% in November 2004.  Source: 
 Business Day, December 6. 
 
 South Africans Abroad Keep Contact 
 ---------------------------------- 
 
 ¶5.  Most South Africans living abroad have not completely 
 cut ties with the country, with 77% of them retaining 
 their South African investments, 69% maintaining South 
 African bank accounts, and 32% owning houses, according to 
 the Homecoming Revolution, sponsored by the First National 
 Bank.  In addition, 81% of respondents said they intended 
 to return to South Africa in the future.  Homecoming 
 Revolution Managing Director Martine Schaffer said the 
 research did not ask about the skills of the respondents, 
 and could not give a breakdown of the sectors likely to 
 benefit from the homecoming.  The survey was conducted on 
 a group of 1192 respondents.  The survey found that the 
 main reasons for reluctance to return to South Africa were 
 crime (44%), poorer quality of life (20%), affirmative 
 action and black economic empowerment policies (19%), and 
 lack of job opportunities (15%).  Source:  Business Day, 
 December 6. 
 
 Business Confidence Still High 
 ------------------------------ 
 
 ¶6.  Business confidence remained high in November due to 
 strong domestic demand, and was likely to retain these 
 levels barring a hike in interest rates.  The South 
 African Chamber of Business' (SACOB) business confidence 
 index rose slightly to 126.5 in November, up from 126 in 
 October.  The SACOB index has remained stable for the past 
 four months.  Over the past 15 months, it has recorded a 
 spread of only six index points between its lowest and 
 highest levels.  SACOB economist Richard Downing said the 
 positive financial environment had led to the higher level 
 of business confidence and that low interest rates and low 
 inflation supported confidence remaining high.  Plans to 
 increase the economy's growth rate to 6% will have to 
 increase supply potential.  The ratio of investment to 
 gross domestic product (GDP) is currently at about 17%, 
 and will need to be above 20% to achieve sustainable 6% 
 economic growth.  Source:  Business Day, December 7. 
 
 South African Teacher Shortage Looms 
 ------------------------------------ 
 
 ¶7.  South Africa faces a teacher shortage at a time when 
 pupil numbers are increasing, according to Mary Metcalfe, 
 head of the University of Witwatersrand's School of 
 Education.  South Africa will have few teachers in the 30- 
 34 age group and fewer than 20,000 aged 35-39 due to a 
 12.7% HIV prevalence rate among teachers, up to 21,000 
 South African teachers leaving the profession, and 
 upcoming retirements.  Metcalfe asserted that South Africa 
 should have 25,000 teachers qualifying each year compared 
 to the 5,000 teacher qualifying currently.  South Africa's 
 Department of Education has stated that there is no 
 teacher shortage, as there are enough unemployed or 
 underemployed teachers to avert any shortage.  Source: 
 Business Day, December 7. 
 
 Competition Commission Found Higher Car Prices but no 
 Legal Case 
 --------------------------------------------- -------- 
 
 ¶8.  The Competition Commission found that car prices in 
 South Africa were higher, but did not find justification 
 for legal actions against car manufacturers, as the 
 companies were not defined as dominant players according 
 to South Africa's competition law.  The 18-month-long 
 investigation into excessive pricing showed that cars in 
 South Africa cost about 14% more than in Europe.  The 
 
PRETORIA 00004829  003 OF 003 
 
 
 Commission announced, however, that it had entered into 
 settlement agreements with six car makers and importers 
 relating to earlier investigations into collusion and 
 minimum resale pricing in the industry.  General Motors 
 (GM), Nissan, DaimlerChrysler, Citron, Volkswagen and its 
 Gauteng dealers, along with Subaru, would pay a collective 
 administrative penalty of R31.6 million ($5 million, using 
 6.5 rands per dollar).  By accepting settlement 
 agreements, these companies avoided further investigation 
 and possible prosecution by the Competition Tribunal.  The 
 Commission has also found evidence of anticompetitive 
 behavior by BMW, but said it was still negotiating with 
 the company.  Much of the Commission's findings in its 
 investigations related to a high level of control car 
 makers have over dealerships.  The National Automotive 
 Dealers' Association welcomed the Commission's requirement 
 that car makers that had entered into settlement 
 agreements had to review dealer franchise agreements. 
 Source:  Business Day, December 8. 
 
 SA Wants to be Africa's Services Hub but Finds High IT 
 Costs a Barrier 
 --------------------------------------------- --------- 
 
 ¶9.  South Africa has been trying to position itself as the 
 business services hub on the continent, but high 
 telecommunications costs and skills shortage have 
 constrained local service providers from competing 
 successfully in the global market, according to Raymond 
 Ngcobo, the head of the Strategic Competitiveness Unit in 
 the Department of Trade and Industry (DTI).  Over the next 
 three years, Ngcobo said the government would give 
 priority to business process outsourcing, financial 
 services, tourism and construction as these sectors had 
 the potential to create jobs.  As part of the plans to 
 accelerate growth to a sustainable 6% by 2010, the DTI was 
 drafting a services strategy that would address 
 bottlenecks such as exorbitant telecoms costs and 
 infrastructure-related constraints.  Between 2000 and 
 2004, global trade in services grew by 8.5% despite the 
 tight regulation of the market by many countries.  Source: 
 Business Day and Business Report, December 8. 
 
 TEITELBAUM