VZCZCXRO7662
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #5009/01 3620955
ZNR UUUUU ZZH
R 280955Z DEC 05
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0661
RUCPCIM/CIMS NTDB WASHDC
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 PRETORIA 005009 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND 
TREASURY FOR OAISA/JRALYEA/BCUSHMAN 
USTR FOR PCOLEMAN 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: RAND SETTLES DOWN IN 2005 
 
REF:  A)  PRETORIA 1959,  B) PRETORIA 4936 
 
¶1.  Summary.  In 2005 the South African rand has shown less 
volatility than in the previous three years, prompting 
speculation that the rand will settle around a relatively 
narrow range of R6.35-6.70 per dollar for 2006.  Increased 
liquidity has helped, with the average daily turnover in the 
country's foreign exchange market has increased from $3.8 
billion in the first quarter of 1998 to $13.8 billion in the 
third quarter 2005.  Improved credit ratings and growth 
prospects have also helped stabilize the rand, along with 
increased foreign direct investment in 2005.  Monetary 
policy has kept inflation under control, with the consumer 
price index measure monitored by the South African Reserve 
Bank within its 3% to 6% target range for 27 straight 
months.  With commodity prices expected to remain high and 
growth prospects favorable, the rand should become more 
stable, perhaps attracting even more foreign investment. 
End Summary. 
 
Rand Instability:  Is it History? 
--------------------------------- 
 
¶2.  The South African rand has lost about 12 percent against 
the dollar in 2005 to date, its first depreciation over a 
calendar year since 2001 and a relatively mild move after 
three straight years of hefty gains.  In 2002 it increased 
40% against the dollar, in 2003 it added 28% and last year 
it increased another 18%.  The rand's swings have also 
moderated recently.  In 2005 it ranged between a high of 
5.617 to the dollar, reached early in January, to a low of 
6.977 in June, a difference of 136 rand cents.  In 2004 its 
range was about 200 rand cents, in 2003 almost 300 rand 
cents and in 2002 it was 410 rand cents.  In December 2001, 
when it sank to 13.84 to the dollar, the currency was 
extremely volatile, gaining around 200 rand cents alone in 
the last 10 days of the year.  In 1998, when the Asian 
currency crisis hit, the rand's range was only 200 rand 
cents between its high and low, illustrating that 2005 might 
be the beginning of a stable rand. 
 
Increased Liquidity 
------------------- 
 
¶3.  Increased liquidity has helped the rand to stabilize. 
According to the South African Reserve Bank (SARB), the 
average daily turnover in the country's foreign exchange 
market has increased from $3.8 billion in the first quarter 
of 1998 to $13.8 billion in the third quarter of 2005.  In 
fact, the rand is the most actively traded emerging market 
currency.  Some of this increase may be due to speculation 
as growth in trade and the economy, while brisk, has not 
matched growth in foreign exchange liquidity.  Moreover, the 
increased size of the market has made it more difficult for 
speculators to dramatically influence the value of the rand. 
In the past, the rand has been most erratic when trading is 
low. 
 
¶4.  Deepening liquidity also points to growing confidence in 
a well-managed economy.  Fiscal deficits have remained low 
and inflation targeting has kept interest rates within the 
3% to 6% targeted range for the past 27 months.  Since 2000, 
the deficit to GDP ratio has remained below 2.5%, reaching 
2% by year's end in 2004.  In the third quarter 2005, it had 
reached 1.5%, due to higher than expected revenue 
collection. 
 
Better Growth Prospects 
----------------------- 
 
¶5.  The rand has stabilized recently, even though current 
account deficits are on the increase.  The ratio of current 
account deficit to GDP has steadily increased from -1.3% in 
2003 to -4.7% in the third quarter 2005 (all quarters in 
2005 have been above -3.7%).  Better growth prospects in 
2005 have attracted foreign inflows.  Increased foreign 
direct investment inflows have included British bank 
Barclays purchase of a controlling stake in local bank ABSA, 
worth over $4 billion and British cellular group Vodafone's 
50% purchase of South African cell phone provider Vodacom, 
worth $2.4 billion (Reftels).  In August 2005, international 
ratings agency, Standard & Poor's, upgraded South Africa's 
currency, putting South Africa's ratings at BBB+, one notch 
below the A category.  Moody's upgraded South Africa's 
credit ratings in January 2005 and Fitch has put South 
 
PRETORIA 00005009  002 OF 002 
 
 
African on positive ratings watch, indicating that an 
upgrade could come later. 
 
¶6.  Commodity prices have remained high in 2005 and should 
remain high.  The gold price reached $500 in early December 
and in recent trading remains above $500.  South Africa's 
economy is expected to grow by 5 percent in 2005 after 
expanding 4.5 percent in 2004.  The South African government 
wants to double the long run growth rate from 3% to 6%. 
Detailed plans on how to achieve this should be released in 
January 2006.  However, current demand trends should support 
GDP growth over 4%.  Both consumption and investment show 
strong gains.  In 2004, growth in household consumption and 
capital formation reached 6.5% and 8.8%, with third quarter 
2005 growth at 6.1% and 7.1%, respectively.  The black 
middle class has grown by 30% in the past 12 months, 
increasing the black's population share of South Africa's 
middle class to almost one third, according to the 2005 All 
Media and Product Survey.  Between 1993 and 2003, though the 
demographic composition of the population remained the same, 
black household's contribution to total household 
expenditure increased from 36% to 46%, making blacks the 
country's biggest consumer base.  Consumer demand growth 
prospects remain good. 
 
¶7.  Comment.  Currency stability remains important for 
foreign investors.  Up to now, most foreign investment has 
been portfolio inflows, although direct investment in South 
Africa has increased substantially over the past year.  High 
commodity prices, improved growth prospects, increased 
foreign liquidity and improved credit ratings have all led 
to a more stable rand in the past year.  To achieve a 6% 
long run growth, South Africa needs more foreign direct 
investment and a more stable rand can only help. 
 
TEITELBAUM