VZCZCXRO9704
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #5034/01 3640819
ZNR UUUUU ZZH
R 300819Z DEC 05
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0694
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 005034 
 
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 30 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: 
 
 -  SNO Needs R9 Billion to Start; 
 -  Growth in 2006 GDP May Slow as Consumer Demand Eases; 
 -  Will the Rand Stabilize?; 
 -  SA's Major Banks Increase Market Share; 
 -  SA, China Close to Agreement to Limit Textile Imports; 
 and 
 -  Land Restitution Spending Increases 
 End Summary. 
 
 SNO Needs R9 Billion to Start 
 ----------------------------- 
 
 ¶2.  The second national telephone operator (SNO) licensed 
 earlier in December will need a capital investment of 
 about R9 billion ($1.4 billion, using 6.3 rands per 
 dollar) before it can start commercial operations planned 
 for the third quarter 2006, according to a recent Merrill 
 Lynch study.  Although details of the funding are still 
 being discussed, the SNO's 26% strategic equity partner, 
 Tata Holdings, has already spent R1.5 billion ($240 
 million) while parastatals Eskom Telecommunications and 
 Transtel, which own 15% each in the SNO, have spent R2 
 billion ($320 million) on network capital expenditure. 
 Black economic empowerment firm Nexus, which at 19% holds 
 the second-biggest stake in the SNO, would have to fund 
 all or part of the remaining R5.5 billion ($873 million). 
 The Independent Communications Authority of South Africa 
 issued the SNO with a 25-year renewable license to provide 
 public-switched telecommunications services to about 14 
 specific areas.  The second operator will use Telkom's 
 network for a period of two years after its launch. 
 Telkom will also have monopoly of the local loop for at 
 least two more years after the launch of the second 
 operator.  Whereas Telkom's operating license requires it 
 to provide a service to every person in South Africa who 
 requests it, the SNO is obliged only to make services 
 available to the 14 network service areas.  The second 
 operator, which still does not have a name, is required to 
 ensure availability of services to 50% of the population 
 within the 14 network areas in the next five years.  It 
 also has to ensure that 80% of the entire South African 
 population can access its services after 10 years.  Other 
 license requirements include providing high-speed internet 
 connectivity to at least 2,500 schools and 2,500 rural 
 clinics. Merrill Lynch forecasted that because of delays 
 in the launch of the SNO, it would take only 2.5% of 
 Telkom's market share by 2007, down from the bank's 
 initial estimate of 4%.  Telkom had projected that it 
 might lose 10%-15% of its market share to the second 
 operator in the next five years.  Source:  Business Day, 
 December 27. 
 
 Growth in 2006 GDP May Slow as Consumer Demand Eases 
 --------------------------------------------- ------- 
 
 ¶3.  South Africa's GDP growth is expected to ease to 
 slightly below 5% in 2006 from just above 5% this year, as 
 consumer demand consolidates.  The median forecast for 
 2006 is 4.9% with a range of 4.5% to 5.3%.  Household 
 consumption expenditure is forecast to slow to 5.5% next 
 year from 6.9% in the first three quarters in 2005, 6.5% 
 in 2004, and 3.5% in 2003.  The slowing in consumer demand 
 is corroborated by recent slowdown in real retail sales 
 growth with September 2005 slowing to 4.7% y/y increase 
 after 8.2% y/y rise in August and 2005's peak y/y gain of 
 9.3% y/y in April.  With growth optimists, exports become 
 a key determinant in attaining higher growth.  For the 
 first three quarters in 2005, exports increased 13.2% 
 after a 2.5% gain in 2004.  South African exports of bulk 
 commodities increased by 10.6% y/y in November to a record 
 10.8 million tons.  Those expecting lower growth fear that 
 a possible interest rate increase will constrain consumer 
 demand, and that government promises of increased fixed 
 investment will not happen.  General government fixed 
 investment only grew by 4.2% y/y in the first three 
 quarters of 2005 compared with a 12.0% gain in 2003, which 
 slowed to 6.3% in 2004.  Source:  I-Net Bridge and Sunday 
 Times, December 27. 
 
PRETORIA 00005034  002 OF 003 
 
 
 
 Will the Rand Stabilize? 
 ------------------------ 
 
 ¶4.  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.  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 the rand increased 
 40% against the dollar, in 2003 it added 28%, and in 2004 
 the rand 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 reached 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 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.  Source:  Reuters, December 27. 
 
 SA's Major Banks Increase Market Share 
 -------------------------------------- 
 
 ¶5.  South Africa's four largest banks continued to 
 increase their market share, according to data from the 
 South African Reserve Bank (SARB).  In October 2005, First 
 National Bank (FNB) has the largest market share in five 
 of the eight categories monitored by the SARB.  FNB has 
 47.8% of the commercial credit card market and 26.5% of 
 the individual market.  However, Standard Bank still has 
 the largest market share in the credit card market, 
 although they lost a large share of the commercial market 
 during October.  Nedbank has a market share of 14%, 
 compared with ABSA's 23%, FNB's 27% and Standard Bank's 
 34%.  ABSA dominates the mortgage market at 32%, although 
 FNB (17%) is also providing stiff competition.  ABSA also 
 has the highest share of the overdraft market (31%), 
 although they lost some market share from September to 
 October.  Source:  Business Day, December 28. 
 
 SA, China Close to Agreement to Limit Textile Imports 
 --------------------------------------------- -------- 
 
 ¶6.  The South African government is about to conclude a 
 voluntary restraint agreement with China to limit imports 
 of Chinese clothing and textile products, according to 
 Trade and Industry Deputy Minister Rob Davies.  Davies 
 said signature of an agreement on the same lines as that 
 reached between China and the European Union (EU) earlier 
 in 2005 was imminent.  The voluntary restraint agreement 
 between the EU and China intends to limit the growth in 
 imports of 10 Chinese textiles and clothing products 8%- 
 12.5% a year until the end of 2008.  About four months ago 
 the textile industry (with trade unions backing), sought 
 government support for the imposition of WTO safeguards. 
 WTO safeguards allow for the temporary re-imposition of 
 quotas on Chinese clothing and textile imports if they 
 increased to such an extent that they harmed domestic 
 industries.  However, the South African government has 
 been reluctant to involve WTO safeguards as South Africa 
 exports basic commodities to the Chinese market.  Both 
 labor and business have blamed the large increase in 
 Chinese imports for the decline of the industry, which has 
 lost an estimated 55,000 jobs since 2003.  Source: 
 Business Day, December 28. 
 
PRETORIA 00005034  003 OF 003 
 
 
 
 Land Restitution Spending Increases 
 ----------------------------------- 
 
 ¶7.  The Land Affairs Department spent R1.017 billion ($160 
 million) on land restitution in 2004-05, up from R727 
 million ($115 million) in 2003-04. According to its annual 
 report, the department also spent R327 million ($52 
 million) on land reform programs, compared to R347 million 
 ($55 million) spent in 2003-04.  Land department programs 
 (including administration, surveys and mapping, spatial 
 planning and cadastral surveys which show the extent and 
 measurement of every block of land), and land reform and 
 restitution programs cost about R2 billion ($320 million) 
 in 2004-05, up from R1.6 billion ($254 million) in the 
 previous year.  Source:  I-Net-Bridge and Business Day, 
 December 29. 
 
 TEITELBAUM