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RR RUEHDU RUEHJO RUEHMR
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ZNR UUUUU ZZH
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FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 1296
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 000432 
 
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 FEBRUARY 3 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: 
 
 -  Interest Rates Remain Unchanged; 
 -  December's Trade Surplus Though Trade Deficit for Year; 
 -  Money Supply and Credit Growth Higher than Expectations; 
 -  Growing Fears of Transnet Strike Impacting Manufacturers; 
 -  Manufacturing Sector Shows Weakness in January; 
 -  Job Creation Perceived Essential; 
 -  Unemployment Remains SA's Biggest Challenge; 
 -  Continued Provincial Underspending Expected; and 
 -  Half of Municipalities Fail to Submit Financial 
 Statements. 
 End Summary. 
 
 Interest Rates Remain Unchanged 
 ------------------------------- 
 
 ¶2.  The Monetary Policy Committee (MPC) of the South 
 African Reserve Bank (SARB) announced that the repurchase 
 rate would remain at its current 7% during its fifth 
 consecutive meeting which resulted in no change in 
 interest rates.  SARB cited robust credit demand and high 
 oil prices as the biggest risks to future inflation, 
 although SARB saw little evidence of second-round 
 inflation coming from higher energy prices.  According to 
 SARB's current forecast, CPIX (targeted inflation which 
 excludes mortgage costs) should peak at 4.9% in the 1st 
 quarter 2007, reaching 4.7% by the end of 2007.  SARB also 
 noted additional inflationary risks from higher food 
 prices, although asserted that 2005 food prices were 
 relatively low so food price acceleration in 2006 is not 
 unexpected.  The MPC decision was expected, as most 
 financial analysts expect future movements in interest 
 rates later in 2006 or early 2007.  All 20 economists in 
 the Reuters poll expected that the MPC would leave 
 interest rates unchanged during the February meeting. 
 Source:  Statement of the Monetary Policy Committee, and 
 Reuters, February 2. 
 
 December Trade Surplus Though Trade Deficit for Year 
 --------------------------------------------- ------- 
 
 ¶3.  December's trade surplus of R3.9 billion, the first 
 trade surplus in six months and the largest in two years, 
 increased over November's deficit of R3.1 billion due to 
 reductions in imports of machinery and electrical 
 equipment, according to the South African Revenue Service. 
 Exports reached R29.6 billion, a reduction of R833 million 
 from November's level, while imports declined by 
 significantly greater amount of R7.8 billion, reaching 
 R25.7 billion.  Despite the monthly surplus, the trade 
 account showed a deficit R21.8 billion for 2005, almost 
 double the 2004 R12.7 billion trade deficit.  December's 
 value of exports and imports declined 2.7% and 23.3%, 
 while the 2005 value of exports and imports increased 
 12.1% and 14.6%, respectively.  Many argue that the 
 holidays explained the increased December trade surplus. 
 Retailers increased purchases in preparation for the 
 holidays, as imports showed gains in October and November 
 and subsided in December.  According to Kagiso Securities 
 economist Elize Kruger, a continued trend of current 
 account deficits underscore the need for capital flows to 
 finance deficits and represents the biggest risk to a 
 stable outlook for the rand.  Source:  Standard Bank, 
 Foreign Trade Alert, January 31; Business Day, February 1. 
 
 Money Supply and Credit Growth Higher than Expectations 
 --------------------------------------------- ---------- 
 
 ¶4.  Demand for credit by the private sector rose by 19.7% 
 in the year to December, above market expectations of 
 18.6%, and faster than November's 18.8%, according to the 
 South African Reserve Bank (SARB).  The broadly defined M3 
 measure of money supply grew by 18.1%, above consensus 
 forecasts and November's growth of 17.3% and 16.4%, 
 respectively.  The SARB also indicated that its 
 international liquidity position rose to $17.2 billion in 
 December from $16.5 billion in November, increasing its 
 import cover ratio to 20.3 weeks (or 5.1 months) compared 
 to November's import cover of 15.4 weeks.  Source: 
 
PRETORIA 00000432  002 OF 003 
 
 
 Business Day and I-Net Bridge, January 31. 
 
 Growing Fears of Transnet Strike Impacting Manufacturers 
 --------------------------------------------- ----------- 
 
 ¶5.  Manufacturers are beginning to fear that the Transnet 
 strike, which began on January 30, will lead to possible 
 shortages in raw materials and delays of their shipping 
 schedules.  Four striking labor unions (South African 
 Transport and Allied Workers Union, United Transport 
 Alliance Union, United Association of South Africa and 
 South African Railways and Harbors Union, involving 15,200 
 workers) disagreed with Transnet's process of disposing 
 its non-core business units without obtaining prior union 
 approval.  The strike started in Richards Bay and Durban, 
 and if not settled, will impact Port Elizabeth and Cape 
 Town and will then become nationwide.  According to 
 Reuters, the strike could cost R100 million ($16.7 
 million) a day.  As the strike continues, the impact on 
 the Durban container terminal, handling 65% of South 
 Africa's container traffic, will become more pronounced as 
 exporters may not meet shipping schedules but are still 
 liable for the fee.  The unions claimed support for the 
 strike was close to 100% of workers at key Transnet 
 operations of ports, freight and commuter rail in the 
 KwaZulu-Natal province.  According to Transnet, 4,000 
 workers had participated in the strike, while the unions 
 said 9,500 workers were involved.  Pradeep Maharaj, 
 Transnet's Executive for Strategy and Transformation, said 
 the Durban container terminal was operating at 40% 
 capacity on January 31, down from about 65% the previous 
 day.  Source:  Business Day, January 31; Business Report, 
 February 1. 
 
 Manufacturing Sector Shows Weakness in January 
 --------------------------------------------- - 
 
 ¶6.  In January, manufacturing activity declined sharply 
 showing possible contraction in the near future.  The 
 Investec Purchasing Managers Index (PMI), a leading 
 indicator of South African manufacturing activity, fell to 
 48.1 from 52.5 in December.  January's activity index 
 reached below 50, indicating a contraction in 
 manufacturing activity, for the first time since October 
 ¶2003.  The recent strength of the rand explains January's 
 weakness, although slower manufacturing growth prospects 
 should not impact overall South African growth, according 
 to ABSA economist Monale Ratsoma.  Consumer spending and 
 infrastructure spending remains the main drivers for 2006 
 growth, and over the longer term, manufacturers will 
 adjust to a strong rand by increased efficiency.  The 
 largest declines in the PMI came from the subindices for 
 business activity and new sales orders, which together 
 account for about 45% of the overall index.  The business 
 activity index dropped to 49.2 from 55.5, while new sales 
 orders also fell, to 47.9 from 53.1.  The sector employs 
 1.2 million people and accounts for more than 16 percent 
 of gross domestic product.  Source:  Business Day and 
 Business Report, February 2. 
 
 Job Creation Perceived Essential 
 -------------------------------- 
 
 ¶7.  In February and July 2005, marketing firm Research 
 Surveys conducted metropolitan surveys showing that South 
 Africans thought job creation was very important and the 
 government had not done a good job in its job creation 
 policies.  Only 29% of the people interviewed in February 
 agreed that the government had done a good job reducing 
 unemployment, while 64% disagreed and 7% did not know.  By 
 July, 13% thought the government was creating jobs fast 
 enough, 81% said jobs were not being created fast enough, 
 and 6% did not know.  The survey sample was 2,000 South 
 African adults in seven metropolitan areas.  Source:  Cape 
 Times, January 30. 
 
 Unemployment Remains SA's Biggest Challenge 
 ------------------------------------------- 
 
 ¶8.  According to "Projection of Future Economic and 
 Sociopolitical Trends in SA up to 2025," released by the 
 Bureau for Market Research (BMR) at the University of 
 South Africa, unemployment remains South Africa's biggest 
 challenge, followed by crime, economic growth, skills and 
 
PRETORIA 00000432  003 OF 003 
 
 
 HIV/AIDS.  More than 45% of those surveyed said they 
 expected only a slight decrease in unemployment by 2007. 
 Another 25% expected the unemployment level to stay the 
 same.   A panel of 13 economists polled did not expect 
 employment growth to exceed 1.6% between 2005 and 2010 
 because of labor market legislative rigidities, a limited 
 pool of sufficiently skilled workers, and a skewed skills 
 mix available for employment.  The panel of economists 
 expected that South African growth would reach 3.3% 
 between 2005 and 2010, with average growth rising to 3.6% 
 between 2011 and 2025.  If rigidities in the economy and 
 skill deficiencies were eliminated, growth above 5% was 
 possible.  Reduced corruption seemed unlikely, for both 
 corporations and government.  More than 85% of all 
 participants expected corruption in government to either 
 stay the same or get worse by 2007, and only 14% of the 
 panelists saw a decrease in corruption by 2010.  Close to 
 90% expected corporate corruption to either stay the same 
 or get worse by 2007.  The BMR study surveyed 72 South 
 African chief executive officers and economists.  Source: 
 Business Day and Business Report, January 31. 
 
 Continued Provincial Underspending Expected 
 ------------------------------------------- 
 
 ¶9.  The National Treasury expects continued provincial 
 underspending on capital projects during the current 
 fiscal year (ending March 31).  The National Treasury's 
 figures on provincial expenditure showed provinces spent 
 71% (R155 billion, $26 billion using 6 rands per dollar) 
 of their total adjusted budget of R219.2 billion ($37 
 billion) by end-December 2005, but only 55% (R7.7 billion, 
 $1.3 billion) of their R13.3 billion ($2.2 billion) 
 capital budget.  The capital expenditure was higher than 
 the amount spent over the corresponding period in 2004; 
 however, Treasury expected that provinces would underspend 
 by the same proportion as in the 2004/05 financial year. 
 Lack of skilled staff hampers local and provincial 
 authorities spending, accounting for the poor provision of 
 services in many rural parts of the country. 
 Significantly low rates of capital spending were 
 concentrated in Limpopo (42.7%) and Free State (45.9%) 
 with the highest being Eastern Cape with 65.6% and 
 Mpumalanga at 63.7%.  Total provincial spending ranged 
 from the lowest share of 68.3% in Free State and 68.4% in 
 North West to the highest at 72.2% in Eastern Cape and 
 71.8% in Mpumalanga and Northern Cape.  Source:  Business 
 Day, January 31. 
 
 Half of Municipalities Fail to Submit Financial Statements 
 --------------------------------------------- ------------- 
 
 ¶10.  Nearly half of South Africa's 284 municipalities did 
 not submit annual financial statements, according to 
 Auditor General Shauket Fakie.  The Municipal Finance 
 Management Act requires that all accounting officers must 
 prepare annual financial statements within two months of 
 the financial year end.  The current financial year was 
 the first in which the Municipal Finance Management Act of 
 2003 was implemented and 148 or 52% of all municipalities 
 met the submission date of August 31, 2005.  A total of 35 
 (12%) submitted statements between September 1 and 30 2005 
 while a further 101 (36%) had not submitted annual 
 financial statements by the end of September.  The 2005 
 compliance levels, however, were an improvement over 2004. 
 At the end of August 2004, only 6% of municipalities had 
 submitted statements for the 2003/04 year while a further 
 29% had submitted by the end of September. Altogether, 65% 
 had not submitted annual financial statements by September 
 ¶2004.  Source:  I-Net Bridge, February 2. 
 
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