VZCZCXRO2561
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #1548/01 1031402
ZNR UUUUU ZZH
R 131402Z APR 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 2832
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 PRETORIA 001548 
 
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 APRIL 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: 
 
 -  Interest Rates Unchanged; 
 -  Manufacturing Production Slows in February; 
 -  Reserve Bank Slows Reserve Accumulation; 
 -  Global Investors Taking a Long View Term of SA; 
 -  Mid-Sized Business Survey Results on Trade; and 
 -  March Trade Activity Improves. 
 End Summary. 
 
 Interest Rates Unchanged 
 ------------------------ 
 
 ¶2.  The South African Reserve Bank (SARB) left its 
 repurchase rate unchanged at the April 12-13 Monetary 
 Policy Committee meeting.  Citing strong consumer demand, 
 credit growth, and rising international oil prices as 
 continuing threats to inflation, SARB Governor Tito 
 Mboweni expected the inflation outlook to remain within 
 its targeted range of 3%-6% until 2008.  Mboweni noted 
 that CPIX inflation excluding fuel increased 3.3% in the 
 first two months of 2006, close to the lower end of the 
 targeted range.  Expected inflation should peak just below 
 5% in the first quarter of 2007 and then decline to 4.6% 
 throughout 2008.   According to the latest inflation 
 survey conducted by the Bureau for Economic Research, CPIX 
 should remain below 5% until the end of 2008.  The 
 Monetary Policy Committee perceived more risks towards 
 future increased inflation, although with little current 
 evidence, left interest rates unchanged.   The latest 
 Reuters poll of economists found all polled expected no 
 interest rate change.  Source:  Reuters and SARB, 
 Statement of the Monetary Policy Committee, April 13. 
 
 Manufacturing Production Slows in February 
 ------------------------------------------ 
 
 ¶3.  Manufacturing production grew 3.8% in February, slower 
 than January's growth of 5.8%, primarily due to slower 
 monthly growth in the basic iron and steel and metal 
 products, non-metallic mineral products, and the motor 
 vehicle and parts industries.  February is the second 
 consecutive month of slowing manufacturing production 
 growth, although both January and February 2006's y/y 
 growth came in higher than January and February 2005's 
 growth of 3.3% and 2.6%, respectively.  On a seasonally 
 adjusted month-on-month basis, output declined by 0.8%. 
 In the three months to February, manufacturing grew 2%. 
 After growing by 5.6% in the third quarter 2005, the 
 manufacturing sector declined by 0.3% in the fourth 
 quarter, with 2005 yearly growth at 3.5%.  Manufacturing 
 accounts for 16% of GDP.  Source:  Reuters, Statistics SA 
 P3014.2, April 11; Business Day, April 12. 
 
 Reserve Bank Slows Reserve Accumulation 
 --------------------------------------- 
 
 ¶4.  The South African Reserve Bank (SARB) slowed its 
 reserves accumulation in March as the rand slightly 
 weakened.  Economists expect reserves to increase 
 moderately over the next few months.  Gross reserves 
 reached $23 billion in March, an increase of $398 million, 
 and the international liquidity position, or net reserves, 
 rose $517 million to $19.5 billion.  Foreign exchange 
 reserves increased to $20.6 billion, from $20.2 billion in 
 February.  Analysts expect increased reserves accumulation 
 in April as the rand strengthened briefly to below R6 to 
 the dollar in the first week of April, buoyed by a 
 stronger euro and a gold price trading at 25-year highs. 
 The rand weakened slightly during March as it averaged 
 R6.20 per dollar compared to February's 6.12.  However, 
 according to Stanlib Asset Management economist Kevin 
 Lings, South Africa still has a relatively low level of 
 reserves compared to most emerging economies.  The SARB 
 has not indicated a target level for reserves, but rather 
 that they will continue to build reserves when it is 
 appropriate.  A higher gold price during March increased 
 SARB's accumulation of gold reserves to $2.3 billion and 
 the gold price rose to $586/oz, from $557/oz in February. 
 Gold now accounts for 10% of total reserves.  Source: 
 
PRETORIA 00001548  002 OF 002 
 
 
 Reuters and Business Day, April 10. 
 
 Global Investors Taking a Long Term View of SA 
 --------------------------------------------- - 
 
 ¶5.  According to South African financial analysts, global 
 investors are beginning to diversify their investments in 
 South Africa and taking a long-term view of South Africa's 
 growth prospects.  According to Standard Bank Group 
 economist Goolam Ballim, long-term investors are investing 
 funds in a range of assets through financial instruments, 
 rather than directly putting funds in direct investment 
 projects.  South Africa's depth and liquidity of its 
 financial markets as well as macroeconomic stability and 
 developed legal infrastructure encourages global investors 
 to invest funds with a buy and hold strategy.  Both Ballim 
 and Ian Cruickshanks, head of Strategic Research at 
 Nedbank, explained that the recent stability of the rand 
 is being supported by the strength of gold and other 
 commodities.  Contributing to possible weakening is a 
 sharp fall in the differential between local and offshore 
 interest rates, which makes rand-based fixed interest 
 investments less attractive to foreigners.  At the end of 
 2002, South Africa's repurchase rate was at 13.5%, while 
 the U.S. federal funds rate was 1.25%.  Now the interest 
 rate differential is 2.25%, with the South African 
 repurchase rate at 7% and the U.S. federal funds rate at 
 4.75%.  According to Bloomberg, the gap in yield between 
 South African 10-year bonds and the equivalent U.S. 
 treasuries is near its narrowest since 1997.  Because of 
 improved growth prospects, lower South African interest 
 rates increased earnings in the equity market, encouraging 
 flows between asset classes rather than out of South 
 Africa.  Cruickshanks did not expect an interest rate rise 
 at the Reserve Bank's monetary policy meeting in April, 
 but believed it should come some time this year, barring 
 some unexpected event.  Source:  Business Report, April 
 ¶11. 
 
 Mid-Sized Business Survey Results on Trade 
 ------------------------------------------ 
 
 ¶6.  According to Grant Thornton's 2006 International 
 Business Owners Survey, 61% of mid-sized South African 
 firm owners believed that China's increased trade with 
 South Africa had no impact on current business.  However, 
 China was cited as both the biggest threat and opportunity 
 for business over the next two years.  The U.S. offered 
 the second largest trading opportunity and Zimbabwe was 
 rated as the second-biggest threat to trade.  Only 37% of 
 survey respondents reported that they engaged in 
 international trade, reflecting the regional focus of 
 medium-sized firms.  Grant Thornton surveyed 300 companies 
 in South Africa, employing between 50 and 250 workers. 
 Source:  Business Report, April 11. 
 
 March Trade Activity Improves 
 ----------------------------- 
 
 ¶7.  The South African Trade Activity Index (TAI) rose to 
 56 in March from 50 in February, reflecting a substantial 
 improvement in current trading conditions.  March's index 
 rose above 50 for the first time since November 2005, 
 implying expanding trade activity.  The South African 
 Trade Management Indices, consisting of the TAI and the 
 Trade Expectations Index (TEI) is compiled by the South 
 African Chamber of Business and sponsored by ABSA bank. 
 The TEI, which measures sales activities for the next six 
 months, decreased slightly in March to 66 from 67 in 
 February.  Improvements in current trading conditions were 
 explained by increasing new orders, inventories and 
 supplier deliveries.  The slight decline in trading 
 expectations was due to an expected moderation of sales, 
 input costs increasing by more than inflation, inventory 
 levels rising and possible supply constraints.  Source:  I- 
 Net Bridge, April 11. 
 
TEITELBAUM