VZCZCXRO1137
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #0143/01 0131214
ZNR UUUUU ZZH
R 131214Z JAN 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0910
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 000143 
 
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 JANUARY 13 2006 
 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: 
 
 -  Manufacturing Production Growth Recovers; 
 -  Housing Prices Continue to Slow; 
 -  Credit Demand Slows; 
 -  Trade Deficit Narrows; 
 -  Transnet's Credit Risk from Zimbabwe Parastatals Low; 
 -  Reserves Above $20 Billion 
 -  Business Confidence at 2005 Peak; 
 -  SA's Online Spending Increased 20%; 
 -  SA Vehicle Sales Increase 28.5% in 2005; and 
 -  High School Dropout Rate High 
 End Summary. 
 
 Manufacturing Production Growth Recovers 
 ---------------------------------------- 
 
 ¶2.  In November, South Africa's manufacturing output rose 
 by 3.7% (y/y in volume terms, not seasonally adjusted), 
 compared to October's yearly rise of 0.3% according to 
 Statistics South Africa (StatsSA).  On a monthly basis, 
 manufacturing production rose by 2.1%.  Using a year to 
 date basis, manufacturing production increased by 3.2%, 
 giving a better indication of overall 2005 growth.  Seven 
 out of ten manufacturing sectors experienced positive 
 quarterly growth.  The major contributors to increased 
 growth included the basic iron and steel, non-ferrous 
 metals and metal products and machinery sectors, followed 
 by motor vehicles sector.  The petroleum, rubber, plastics 
 and chemical sector accounted for most of the negative 
 growth in sectors because of petroleum industry changing 
 to lead free fuel, followed by production decline in food 
 and beverages.  Manufacturing is the second-biggest sector 
 (after the service sector) in South Africa, accounting for 
 more than 16% of the economy.  Recent strengthening of the 
 rand poses potential risks to the manufacturing recovery, 
 especially if consumer demand softens.  In recent trading, 
 the rand traded just under 6 rands per dollar.  Source: 
 Reuters and Statistics SA Release P3041.2, January 12. 
 
 Housing Prices Continue to Slow 
 ------------------------------- 
 
 ¶3.  In December 2005, nominal housing prices continued 
 their slowing trend, reaching 14.7% increase compared to a 
 30.8% increase at the beginning of 2005.  The rate of 
 nominal house price growth peaked in September and October 
 2004 at 35% and has since declined steadily.  According to 
 ABSA bank housing surveys, the average house price in 2005 
 was R700,200 ($110,100, using 6.36, the 2005 average 
 rand/dollar exchange rate) compared to 2004's average 
 house price of R574,200 ($89,000, using 6.45, the 2004 
 average rand/dollar exchange rate).  The 2005 growth in 
 mortgages reached 27% and 2006's growth is expected to be 
 20%-22%, along with a growth in real disposable income at 
 6%, according to ABSA senior economist Jacques Du Toit. 
 Adrian Saville, chief investment officer at Cannon Asset 
 Managers asserted that residential property remained an 
 overvalued asset and vulnerable to interest rate 
 increases, although risks of interest rate hikes remain 
 low due to slowing in inflation, money supply and credit 
 growth.  Source:  Business Day, January 12. 
 
 Credit Demand Slows 
 ------------------- 
 
 ¶4.  November's demand for credit by the private sector 
 reached 18.8% (y/y), slower than October's growth of 
 19.3%.  The broadly defined M3 measure of money supply 
 grew by 16.4%, below forecasts, after increasing by 15.9% 
 in October.  Consensus forecasts expected private sector 
 credit demand and M3 to increase by 18.6% and 17.3%, 
 respectively.  The strong demand for private sector credit 
 in 2005 has fueled strong growth in domestic expenditures, 
 leading to an expected 2005 GDP growth of over 5%. 
 Source:  Business Day, December 30. 
 
 Trade Deficit Narrows 
 --------------------- 
 
 
PRETORIA 00000143  002 OF 003 
 
 
 ¶5.  According to the South African Revenue Service, 
 November's trade deficit narrowed compared to October due 
 to strong growth in exports.  The trade deficit narrowed 
 to R3.1 billion from October's R5.5 billion, with exports 
 and imports increasing by 17.1% and 6.4%, respectively. 
 Exports showing the strongest November growth include: 
 vehicles, aircraft and vessels, jewelry, base metals, 
 machinery and electrical appliances and minerals.  Nedbank 
 economist Magan Mistry said the deficit exceeded market 
 expectations of R2 billion.  The cumulative deficit for 
 the period from January to November in 2005 was R24.9 
 billion, compared to R15.3 billion for the same period in 
 ¶2004.  Standard Bank economist Johan Botha said the 
 cumulative deficit had raised fears that the current 
 account deficit might increase from 4.7% of GDP to more 
 than 5%.  Source:  Business Day, December 30. 
 
 Transnet's Credit Risk from Zimbabwe's Parastatals Low 
 --------------------------------------------- --------- 
 
 ¶6.  According to Public Enterprises Minister Alec Erwin, 
 Zimbabwean utility companies owed Transnet R28.7 million 
 ($4.8 million, using 6 rands per dollar) in September but 
 only 0.03%, or R949,000 ($158,167), would not be repaid. 
 Transnet was exposed to credit risk from more than one 
 Zimbabwean parastatal.  Air Zimbabwe owed a monthly 
 balance of R530,000 ($88,330) and the National Railways of 
 Zimbabwe (NRZ) was in a net credit position.  Transnet did 
 not grant a credit line beyond the standard over-border 
 account between NRZ and Transnet.  When Transnet agreed to 
 buy fuel for NRZ, the value was limited to the monthly 
 over-border account to ensure settlement within 30 days. 
 Zesa, the Zimbabwean electricity utility, settled its 
 debt, ranging from R138 million ($23 million) to R14 
 million ($2.3 million), to Eskom by May 2005.  Source: 
 Business Day, January 6. 
 
 Reserves Above $20 Billion 
 -------------------------- 
 
 ¶7.  The South African Reserve Bank (SARB) increased its 
 December foreign reserves to $664 million compared to a 
 $125 million increase in November so that its gross 
 foreign and gold reserves exceeded $20 billion for the 
 first time.  Economists view $20 billion as a minimum 
 safety cushion and many economists expect SARB's foreign 
 reserve buying to continue, given continuing high 
 commodity prices and rand strength.  In August 2005, two 
 ratings agencies (Standard & Poor's, as well as Fitch) 
 upgraded South Africa's foreign currency rating to BBB 
 plus, in part because of the Bank's accumulation of 
 foreign reserves, leading to an improvement in South 
 Africa's ability to repay foreign debt.  Up until February 
 2004, the foreign exchange reserves had fluctuated around 
 the $6 billion since 1999, but then rose to $8.3 billion 
 in March and have risen steadily since.  Although the 
 value of reserves increased 3.7% from $19.9 billion in 
 November to $20.7 billion by December, reserves are now 
 equal to 3.8 months' import cover, lower than the 
 international standard of six months.  Source:  INET, 
 Business Day, January 9; Business Day, January 10. 
 
 Business Confidence at 2005 Peak 
 -------------------------------- 
 
 ¶8.  The South African Chamber of Business's (Sacob) 
 business confidence index reached its 2005 peak in 
 December due to stable interest rates and an optimistic 
 inflation outlook.  December's Sacob business confidence 
 index rose to 129.4 points, up from 126.5 in November. 
 During 2005, business confidence averaged 127.1 points, 
 compared with 124.4 in 2004.  Sacob economist Richard 
 Downing cited strong domestic economic activity as 
 enhancing business confidence but warns about increasing 
 current account deficits as possible risks to the business 
 confidence outlook.  The current account deficit, at 4.7% 
 of GDP in the third quarter of 2005, far higher than the 
 "ideal" 3%, is expected to stabilize at about 4% in 2006. 
 Downing said that in order for business confidence to 
 continue to be positive, the rand had to remain strong to 
 prevent serious inflationary consequences, but not so high 
 as to dampen the export sector.  Sacob also attributed the 
 rise in confidence last month to the rise in gold and 
 platinum prices.  Recently gold prices reached a 24-year 
 
PRETORIA 00000143  003 OF 003 
 
 
 peak of $537/oz, while platinum peaked at $1014/oz on 
 strong demand and supply constraints.  The metals account 
 for about 20% of South African exports.  Source:  Business 
 Day, January 6. 
 
 SA's Online Spending Increased 20% 
 ---------------------------------- 
 
 ¶9.  South Africans spent R514 million ($86 million) 
 shopping online in 2005, 20% higher than 2004, according 
 to a report by research firm World Wide Worx.  The 2005 
 total did not include 2005 online air ticket sales of R1.8 
 billion ($300 million) compared to its 2004 total of R850 
 million ($142 million).  The 2005 online retail shopping 
 growth was lower than the 2004 growth of 25%.  The survey 
 of 800 online retail outlets cited lack of speed in 
 internet access and affordable access to broadband as the 
 biggest obstacles to growth in online sales.  The online 
 retail market was dominated by 10 online retail sites: M- 
 Web ShopZone and Digital Mall, online grocers Pick 'n Pay 
 Home Shopping and Woolworths, book retailers Kalahari.net 
 and Exclusive Books, florist NetFlorist, wine retailer 
 Cybercellar, electronics store Digital Planet, and health 
 and beauty store Ascot Direct.  World Wide Worx expects a 
 further 20 percent increase in online retail shopping in 
 ¶2006.  Research firm BMI-TechKnowledge expects broadband 
 users to increase to 870,000 in the next five years from 
 40,000 in 2005, on expectations of lower internet access 
 prices.  The number of online retail sites has grown from 
 719 at the end of 2003 to 826 in 2005.  The fastest- 
 growing major categories were auctions, gifts and apparel. 
 Source:  Business Report January 10. 
 
 SA Vehicle Sales Increase 28.5% in 2005 
 --------------------------------------- 
 
 ¶10.  South Africans bought more new vehicles in 2005 than 
 in any previous year, according to sales figures released 
 by the National Association of Automobile Manufacturers 
 (NAAMSA).  New vehicle sales (including cars, trucks and 
 buses) reached R125 billion ($21 billion) in 2005 compared 
 to R96 billion ($16 billion) in 2004.  Domestic vehicle 
 sales figures for 2005 increased 28.5% to almost 617,500 
 units, double the number of new vehicles sold five years 
 ago, and higher than the previous record of 482,000 units 
 in 2004.  Sales figures compiled by NAAMSA include NAAMSA 
 and non-NAAMSA members, accounting for 8% of South 
 Africa's market.  Lower interest rates and growing middle 
 class were credited as the major stimulus behind record 
 car sales.  McCarthy chairman Brand Pretorius estimated 
 that McCarthy, South Africa's largest dealer network, sold 
 one of every four or five new cars, and one out of every 
 three used cars, to black customers.  It now took an 
 average South African household in the living standard 
 measure 10 category (average monthly income of R18,822 or 
 $3137) about 37 weeks' earnings to buy a car, compared to 
 71 weeks three years ago.  NAAMSA has not yet totaled its 
 export figures but estimates that approximately 145,000 
 vehicles were exported in 2005, up from the 110,507 
 vehicles exported in 2004.  The vehicle industry 
 contributes about 7.4% to GDP.  Source:  Business Day, 
 January 11. 
 
 High School Drop Out Rate High 
 ------------------------------ 
 
 ¶11.  Less than half of South Africa's grade 10 students in 
 2003 took their high school graduation (matric) exams two 
 years later.  In 2005, 508,363 students took the exams in 
 grade 12, although 1,096,214 students were registered as 
 grade 10 students in 2003.  While 347,184, or 68% of 
 students who took the exam passed in 2005, when calculated 
 as a percent of the 2003 grade 10 class, only 32% of 
 students graduated and 587,851 dropped out of school. 
 Teacher unions had asked for more research about the 
 increased dropout rate in high schools but little has been 
 released.  Source:  Business Day, January 11. 
 
 TEITELBAUM