VZCZCXRO6925
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #0227/01 0201048
ZNR UUUUU ZZH
R 201048Z JAN 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 1036
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 000227 
 
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 20 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: 
 
 -  Consumer Confidence Up; 
 -  Manufacturing Activity Improves; 
 -  October Retail Sales Up 7.7%; 
 -  Predictions of 2006 Budget Proposals; and 
 -  South Africa's 2006 Growth Prospects; 
 End Summary. 
 
 Consumer Confidence Up 
 ---------------------- 
 
 ¶2.  Diminishing chances of a rise in interest rates, along 
 with declining fuel prices, led South African consumers to 
 express strong confidence in the final quarter 2005.  The 
 First National Bank and Bureau for Economic Research at 
 Stellenbosch University (FNB/BER) consumer confidence 
 index rose to 20 in the fourth quarter, compared to 17 in 
 the third quarter 2005.  More people seem confident about 
 their own economic prospects, as income, employment and 
 asset market prices keep rising.  Consumers expect that 
 interest rates will remain constant throughout 2006, 
 although more consumers thought that durable goods should 
 not be purchased now and that housing price growth will 
 stagnate.  Confidence among whites fell, while black 
 consumer confidence rose for the third consecutive 
 quarter.  The confidence of high-income earners rose, 
 while that of low-income earners fell.  Source:  Business 
 Report and Business Day, January 18. 
 
 ¶3.  Comment.  The FNB/BER index is compiled from the 
 results of a survey in which consumers are asked for their 
 outlook for the economy and their own finances in the next 
 year, as well as whether they view the present time as 
 suitable to buy durable goods.  End comment. 
 
 Manufacturing Activity Improves 
 ------------------------------- 
 
 ¶4.  According to the Investec Purchasing Managers Index 
 (PMI), growth in manufacturing improved in December, with 
 PMI reaching 52.5 compared to November's level of 50.  The 
 December rise halted a consecutive four month decline, 
 although the index remains well below the peak of 60 
 reached in July 2005.  Analysts fear the recent strength 
 of the rand could still threaten continued job creation in 
 the manufacturing sector as exports decline and 
 competition increases from cheaper imports.  At the end of 
 December 2005, the rand closed at R6.32 per dollar, and 
 reached R5.96 on January 17, an eight-month high.  PMI's 
 employment index improved in December, although still 
 showing signs of contraction.  December's job index 
 reached 48.7 compared to 45 in November.  Source:  I-Net 
 Bridge, January 18; Business Day, January 17. 
 
 ¶5.  Comment.  A reading above 50 signifies expansion in 
 the manufacturing sector, while a number below 50 
 indicates that manufacturing output is shrinking. 
 Manufacturing accounts for 16.4% of GDP, however, it 
 accounted for almost 22% in 2002.  The latest PMI follows 
 figures from Statistics SA showing manufacturing output 
 grew 3.7% in November compared to the previous month's 
 0.7% growth.  End comment. 
 
 October Retail Sales Up 7.7% 
 ---------------------------- 
 
 ¶6.  In October, South Africa's real retail sales rose by 
 7.7 % (y/y) compared to September's growth of 5%, 
 according to Statistics South Africa.  On a quarterly 
 basis, retail sales rose by 7.0% percent.  Stronger growth 
 in consumer demand has driven faster South African growth 
 since 2002, helped by low inflation and interest rates. 
 Retail sales contributed 13.7% to GDP in the third quarter 
 of 2005.  Although retail sales are expected to continue 
 to grow strongly in 2006, economists expect the rate of 
 growth to stabilize in the absence of any new interest- 
 rate cuts and as higher inflation slows down the pace of 
 real income growth.  Brait economist Colen Garrow said 
 strong retail sales had been supported by both fiscal and 
 
PRETORIA 00000227  002 OF 003 
 
 
 monetary policies, with R74 billion ($12 billion using 6 
 rands per dollar) in tax relief since 1995 and 6.5 
 percentage points reduction in interest rate since 2003. 
 However, he does not expect these expansionary policies to 
 continue.  In addition to the stimulus of tax cuts and 
 lower interest rates, retail sales had benefited from 
 increasing black middle class.  The South African 
 Advertising Research Foundation, which measures movements 
 from Living Standard Measures (LSM) 1 (low income) to LSM 
 10 (high income), had reported significant shifts within 
 the middle income spectrum.  These shifts were 
 concentrated around LSM 6-7, where the number of black 
 South Africans had increased by some 683,000 between 2000 
 and 2004.  Source:  Reuters and Business Day, January 19. 
 
 Predictions of 2006 Budget Proposals 
 ------------------------------------ 
 
 ¶7.  According to Kevin Lings, the chief economist at 
 Stanlib (South Africa's largest mutual funds company), the 
 February 15 South African budget might announce that 
 exchange controls for individuals would be lifted.  In 
 addition, pension funds may also have their offshore 
 limits lifted slightly.  Another of Lings' predictions was 
 that the SA Revenue Service might have collected R40 
 billion ($6.6 billion) more in taxes than was expected.  A 
 growing number of financial firms predicted that the 
 government would collect extra revenue.  BoE Private 
 Clients estimated a total R60 billion ($10 billion) extra 
 revenue, while Johan Rossouw, the chief economist at 
 Vector Securities, estimated a R32 billion ($5.3 billion) 
 overrun with an outside chance of R50 billion ($8.3 
 billion).  The collection of excess revenue opens the 
 possibility of tax cuts and extra government spending. 
 Lings expects individual tax relief, although he is less 
 certain about reduction in company taxes.  He advocates a 
 broad-based policy response to growth obstacles cited 
 recently by a World Bank report surveying 800 South 
 African companies.  These companies cited lack of skilled 
 workers, labor regulations, rand volatility and crime as 
 the main obstacles to sustained 6% growth in South Africa. 
 Source:  Business Report, January 19. 
 
 South Africa's 2006 Growth Prospects 
 ------------------------------------ 
 
 ¶8.  Domestically, economic growth prospects are 
 optimistic.  Uneasiness remains over the extent to which 
 South Africa's future growth prospects depend on global 
 events.  The South African economy has outperformed 
 expectations, with GDP growth now seen at about 5% for 
 2005, and 4%-plus growth expected for 2006.  South Africa 
 benefited from the fairly robust performance of the world 
 economy as reflected in strong demand for exports, high 
 international commodity prices and favorable financing 
 conditions.  The structural improvements inherent in the 
 emergence of a new black middle class, as well as low 
 inflation expectations, suggest that the economy should be 
 able to sustain substantially higher growth.  Globally, 
 economic growth is expected to continue.  The U.S. is 
 expected to continue to outperform other developed 
 countries with 3.4% growth in 2006, while China's growth 
 could reach over 8% again.  Global economic growth risks 
 could point to constraints in achieving high 2006 South 
 African growth rates.  Higher oil prices pose growth and 
 inflationary risks.  Global trade imbalances, such as the 
 U.S.'s large current account deficit and low savings rate 
 and the matching surpluses in Asia, may cause increased 
 volatility in currencies, increases in interest rates and 
 a slowdown in growth.  According to Nedbank's chief 
 economist Dennis Dykes, the key economic vulnerability 
 South Africa faces is the growing current account deficit. 
 As of the third quarter of 2005, the current account 
 deficit had risen to R73 billion or 4.7% of GDP, compared 
 with 3.7% in the second quarter.  Merchandise exports, 
 though improving, continue to be less than imports, which 
 have expanded strongly with record high oil prices, the 
 strong rand and the sustained buoyancy of domestic 
 expenditure.  If foreign capital cannot finance the 
 deficit, the rand would weaken, and higher inflation and 
 interest rates would appear, stunting growth.  Despite the 
 strong likelihood of ongoing pressure on the current 
 account in 2006, JP Morgan economist Marisa Fassler 
 expects the economy to continue to attract strong capital 
 
PRETORIA 00000227  003 OF 003 
 
 
 inflows given the favorable GDP growth outlook.  The 
 improvement in domestic optimism is also reflected in a 
 Merrill Lynch Fund Managers' survey undertaken in December 
 ¶2005. According to the survey, 46% of fund managers 
 (versus 31% in the November survey) expect the economy to 
 grow a little stronger over the next 12 months.  Inflation 
 fears have also eased.  Though most managers still expect 
 interest rate hikes in 2006, the timing of these increases 
 has now shifted from the first quarter 2006 to the second 
 quarter.  More than 45% expect the repurchase rate to be 
 8% or higher in the next 12 months (compared with the 
 current 7%), but only 17% expect the first hike to be in 
 the first quarter 2006. About 42% expect an increase in 
 the second quarter.  Source:  Financial Mail and I-Net 
 Bridge, January 18. 
 
 TEITELBAUM