VZCZCXRO4937
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #1004/01 0691332
ZNR UUUUU ZZH
R 101332Z MAR 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 2126
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 001004 
 
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 MARCH 10 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: 
 
 -  January Manufacturing Growth at 5.6%; 
 -  December Retail Sales Strong; 2005 Sales Growth 
 Decelerates; 
 -  New Vehicle Sales Growth Leveling; 
 -  Manufacturing Continues to Show Signs of Weakness; 
 -  SACOB Business Confidence Falls in February 
 -  Research Points to a Diverse Black Middle Class 
 -  Lehmans Lowers Growth Outlook for South Africa; and 
 -  Firms Begin to Feel HIV/AIDS Impacts on Work Force. 
 End Summary. 
 
 January Manufacturing Growth at 5.6% 
 ------------------------------------ 
 
 ¶2.  Statistics SA announced that January's growth in 
 manufacturing production reached 5.6% (y/y), although it 
 declined by 2.7% (seasonally adjusted) compared to the 
 previous month's growth of 5.8%.  Food and beverages and 
 petroleum and chemical products explained most of the 
 decline in production on a monthly basis.  On a quarterly 
 basis, manufacturing production increased 1.8% (seasonally 
 adjusted) compared to the previous quarter.  The strong 
 rand continues to be a concern for export-intensive 
 manufacturers, although strong international and domestic 
 demand mitigates its effects.  The IMF forecasts higher 
 2006 European growth at 1.2% y/y compared to 0.8% in 2005. 
 In addition, the Southern African Development Community, 
 South Africa's second largest manufacturing export 
 destination, should grow by 5.9% from 4.8% in 2005, 
 according to World Bank forecasts.  Source:  Statistics SA 
 P3041.2, Standard Bank, Manufacturing Unpacked, March 9. 
 
 December Retail Sales Strong; 2005 Sales Growth 
 Decelerates 
 --------------------------------------------- -- 
 
 ¶3.  The 2005 holiday season showed strong consumer 
 spending, though 2005 might be the beginning of a downward 
 growth trend.  Retail sales in December increased 8.9% 
 (y/y) from November's growth of 7.9%, the highest growth 
 in 8 months, according to Statistics SA.  However, for 
 2005, yearly growth decelerated.  Retail sales grew by 
 6.8% in 2005, from 4.9% and 9.7% in 2003 and 2004, 
 respectively.  Consumer demand has been the main source of 
 faster growth in the economy over the past couple of 
 years, aided by the lowest interest rates in more than two 
 decades, low inflation and the spending power of a rising 
 black middle class.  On a quarterly basis, real retail 
 sales increased 8.1% (y/y).  Source:  Statistics SA 
 Release P6242.1, March 8; Business Day, March 9. 
 
 New Vehicle Sales Growth Leveling 
 --------------------------------- 
 
 ¶4.  The National Association of Automobile Manufacturers 
 of SA (NAAMSA) released the February new vehicle sales 
 showing growth may be decelerating in 2006.  In February, 
 new vehicle sales increased by 17.2% (y/y).  February's 
 growth is considerably lower than December 2005's growth 
 of 27.4% and January's 20.3% growth.  According to NAAMSA 
 data, new vehicle sales increased by 25.7% in 2005, 
 although strong growth in vehicle sales may not continue 
 as a strong rand continues to affect exports in 
 automobiles and other manufactured products.  NAAMSA 
 expects automobile growth to continue throughout 2006, 
 although at a slower rate.  Industry projections 
 anticipate 10% growth for 2006.  Auto production is the 
 second-biggest industry in the manufacturing sector, which 
 accounts for more than 16% of the economy.  Vehicles 
 comprise about 7% of South African exports.  Source: 
 Business Day, March 3. 
 
 Manufacturing Continues to Show Signs of Weakness 
 --------------------------------------------- ---- 
 
 ¶5.  Manufacturing activity contracted for the second 
 consecutive month in February and, if sustained, could 
 dampen South Africa's economic growth prospects.  The 
 
PRETORIA 00001004  002 OF 003 
 
 
 Investec Purchasing Managers' Index (PMI) reached 49 in 
 February, slightly up from 48.1 in January.  A reading 
 below 50 suggests a contraction in the sector.  In 
 January, the PMI dropped below 50 points for the first 
 time since October 2003, as the rand strengthened to a 
 monthly average of R6.09 per dollar.  The sustained 
 strength of the rand explains much of the pressure on 
 manufacturing, according Investec Asset Management's head 
 of fixed income, Andre Roux.  Since South Africa's growth 
 in the past two years has been supported by strong 
 increases in consumer demand, a slowing in consumer 
 spending may mean lower overall growth.  Argon Asset 
 Management's Nazeem Hendricks expects a slowing in 
 consumer demand as credit extension and money supply 
 growth continue to level off.  If manufacturing growth 
 fails to accelerate, then overall South African growth 
 expectations may have to be cut.  Manufacturing employment 
 also showed signs of weakness, with the seasonally 
 adjusted employment index at 45.8, down from January's 
 46.7.  Source:  Business Day, March 3. 
 
 SACOB Business Confidence Falls in February 
 ------------------------------------------- 
 
 ¶6.  According to the South African Chamber of Business 
 (SACOB), South Africa's business confidence fell by 3 
 points to 100.1 in February, its biggest drop since 
 October 2004.  Apart from construction, the main growth 
 area remains the service sector.  SACOB noted that 
 electricity, water services and government services were 
 the weakest performers in 2005.  According to SACOB 
 economist Richard Downing, export volumes and 
 manufacturing output are playing more important roles in 
 affecting the business mood.  Exports declined about 30% 
 or R8billion during January, as imports rose by R3.5 
 billion.  Source:  Reuters, March 7; Business Day, March 
 ¶8. 
 
 Research Points to a Diverse Black Middle Class 
 --------------------------------------------- -- 
 
 ¶7.  A University of Cape Town (UCT) "Black Diamond" 
 marketing survey study shows that the rapidly growing 
 black middle class is more diverse than previously 
 thought.  The study, which confirms that the black middle 
 class is the driving force behind South Africa's economic 
 growth, investigated a range of issues, including the 
 respondents' aspirations, attitudes and consumer behavior. 
 The buying power of the black middle class is about R130 
 billion ($22 billion, using 6 rands per dollar) a year, 
 approximately 15% of South Africa's 2004 household 
 consumption.  The study reports that black households in 
 the upper income bracket [earnings of more than R154,000 
 ($26,000)] increased by 368% between 1998 and 2004.  The 
 survey did not reveal that affirmative action had led to 
 frequent job changing.  Only a small percentage of the 
 respondents said they changed jobs more than three times 
 in the last three years.  The respondents were 
 overwhelmingly confident about themselves and their 
 futures, and reported that they had little interest in 
 politics or overseas holidays.  Relatively few are members 
 of medical aid schemes or pension funds.  Most of them say 
 black economic empowerment has benefited only a privileged 
 few and half feel trapped by rising debt.  Although most 
 respondents believe that moving out of the townships shows 
 success, many still live in townships and have no plans to 
 move.  Tradition and custom remains important, with 
 importance of lobola (payment for brides), ritual animal 
 slaughter and ancestor worship continuing.  The less 
 affluent members of the black middle class spent more than 
 their peers with higher incomes.  Real wealth is 
 concentrated mostly among those in the older, more 
 established segment of the black middle class and they 
 tend to invest rather than spend.  The Black Diamond study 
 listed unemployment as the biggest fear, registering 
 higher than crime and HIV/AIDS.  The "Black Diamond" 
 marketing survey involved interviews with 750 adults 
 living in metropolitan areas, selected from both suburban 
 and township areas in Durban, Johannesburg and Cape Town, 
 with an even gender split.  Source:  Sunday Times, 
 February 26; Business Day, March 3. 
 
 Lehmans Lowers Growth Outlook for South Africa 
 --------------------------------------------- - 
 
PRETORIA 00001004  003 OF 003 
 
 
 
 ¶8.  International investment bank Lehman Brothers lowered 
 its 2006 gross domestic product (GDP) growth forecast for 
 South Africa to 4% from 4.5%.  Lehman revised its forecast 
 because it expects the rand to remain strong due to rising 
 global metals prices, leading to a possible manufacturing 
 recession later in the year.  Writing in the bank's Global 
 Weekly Economic Monitor, Lehman Brothers' analyst Robert 
 Beange noted that since November the price of gold had 
 risen by 25% to around $560 per ounce.  Lehmans calculated 
 that the South African current account deficit would 
 amount to 3.5% of GDP in 2006, thus leading to a sustained 
 appreciation of the rand.  Lehman Brothers' estimates 
 suggested that the manufacturing sector could slip into 
 recession during the second and third quarters of 2006. 
 Lehmen Brothers also lowered its forecast for CPIX 
 (headline consumer inflation less mortgage rate changes), 
 with the current estimate of 4% by the end of 2006 
 compared to its previous projection of close to 5%.  They 
 expect the South African Reserve Bank to cut interest 
 rates by 50 basis points at its April Monetary Policy 
 Committee meeting.  Source:  I-Net Bridge and Business 
 Report, March 6. 
 
 Firms Begin to Feel HIV/AIDS Impacts on Work Force 
 --------------------------------------------- ----- 
 
 ¶9.  According to Grant Thornton's 2006 International 
 Business Owners Survey (IBOS), South African business 
 owners are increasingly starting programs to intervene 
 against HIV/AIDS.  Concern runs particularly high in the 
 Eastern Cape cities of Port Elizabeth and East London, 
 where 97% of the businesses surveyed reported a sizable 
 impact on their business growth.  The sectors showing the 
 highest growth in concern were construction and retail, 
 where the percentages increased to 87% and 88%, 
 respectively, from 75% and 74% in 2005.  Training proved 
 the most popular element in companies' HIV/AIDS management 
 plans, with 65% participating in these programs.  However, 
 only 35% of companies pay for employees' treatment costs. 
 Lee-Anne Bac, the director of strategic solutions at Grant 
 Thornton, said the extent of interventions increased 
 compared to 2005, when the majority of business owners did 
 not have any companywide policies.  A study commissioned 
 by AIC Insurance in 2005 showed that South Africa loses an 
 estimated R12 billion a year due to absenteeism in the 
 workplace, of which between R1.8 billion and R2.2 billion 
 could be directly attributed to HIV/AIDS.  In the mining 
 sector, Harmony estimated costs related to HIV/AIDS would 
 amount to 7.5% of total labor costs over the next 15 
 years, while its HIV/AIDS workplace program cost R10 
 million ($1.7 million) in the last financial year. 
 AngloGold Ashanti spent R14.6 million ($2.4 million) in 
 2005 providing antiretrovirals, voluntary counseling and 
 home-based care for terminally ill former employees, as 
 well as research, monitoring and evaluation.  Recently, 
 the Epicenter AIDS Risk Management Foundation was 
 appointed as consultant for a R2.4 million ($400,000) 
 research project funded by the Global Fund for HIV/AIDS. 
 The study will also examine the impact of the pandemic on 
 the business sector, focusing on KwaZulu-Natal, which has 
 been the hardest-hit province.  The Grant Thornton IBOS 
 Survey contacted 300 business owners who employ between 50 
 and 250 staff in South Africa.  Source:  Business Report, 
 March 8. 
 
 TEITELBAUM