VZCZCXRO5001
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #1811/01 1250751
ZNR UUUUU ZZH
R 050751Z MAY 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3193
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 001811 
 
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 MAY 5 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: 
 
 -  Trade Deficits Point to Possible Rand Weakness and 
 Increased Inflation; 
 -  Savings Increase at Year End Although Fall in 2005; 
 -  Manufacturing Shows Improving Activity for the Second 
 Straight Month; 
 -  Competition Complaints Increase; 
 -  Financial Stability Review Warns About Impacts of Interest 
 Rate Rise; 
 -  Car Sales Increase 12.7% in April; and 
 -  Retail Sales Continue to Show Strong Growth. 
 End Summary. 
 
 Trade Deficits Point to Possible Rand Weakness and 
 Increased Inflation 
 --------------------------------------------- ----- 
 
 ¶2.  According to the South African Revenue Service, South 
 Africa's trade deficit narrowed to R2.8 billion in March 
 from R3.9 billion in February as the rand weakened 
 slightly.  Exports increased 13% to R29.9 billion in the 
 month, while imports rose 8% to R32.8 billion.  On a 
 quarterly basis, the deficit reached R14.6 billion, 
 substantially higher than 2005's first quarter deficit of 
 R 4.7 billion and two thirds the value of 2005's yearly 
 deficit of R21.8 billion.  The current account trade 
 deficit increased to 4.2% of GDP in 2005, compared to 3.4% 
 in 2004, and is expected to increase further in 2006.  If 
 commodity prices continue to rise, the rand may remain 
 strong; however, concerns exist about whether South Africa 
 can continue to attract enough capital inflows to finance 
 its widening current account deficits.  Gold accounts for 
 about 8% of South African exports, and rising gold prices 
 contribute positively to the trade account deficit. 
 However, a higher oil import bill will offset the positive 
 influence of increased gold earnings.  Oil imports account 
 for 14.2% of South Africa's imports.  If rising oil prices 
 continue along with strong credit growth, the Reserve Bank 
 may increase interest rates.  Source:  Business Day, and 
 Business Report, May 2. 
 
 Savings Increase at Year End Although Fall in 2005 
 --------------------------------------------- ----- 
 
 ¶3.  According to the SA Savings Institute "Savings 
 Barometer," South Africans saved more during the fourth 
 quarter 2005 although 2005 showed a yearly decrease in 
 savings.  The "Savings Barometer," which measures savings 
 across all the sectors of the economy, increased in the 
 fourth quarter by 1.05 index points to 116.88.  However, 
 the national savings ratio for 2005 fell to 13.5% compared 
 to 14% in 2004 and 17.6% in 2002.  Higher real disposable 
 household income and lower consumer inflation helped 
 improve the savings environment for households in the last 
 quarter of 2005.  Lower government spending as a 
 percentage of gross domestic product and the decrease in 
 government debt had a positive influence on the 
 government's savings.  Households are increasing debt as 
 low interest rates and inflation encourage increased 
 credit growth.  The debt-to-disposable income ratio for 
 households has increased to 65.6%, while household savings 
 are now 0.2% of disposable income.  Source:  Business 
 Report, May 2. 
 
 Manufacturing Shows Improving Activity for the Second 
 Straight Month 
 --------------------------------------------- -------- 
 
 ¶4.  The Investec Purchasing Managers Index (PMI), compiled 
 by the Bureau for Economic Research at Stellenbosch 
 University, increased to 54.3 during April from 51.5 in 
 March, the second consecutive month that the PMI stayed 
 above the level of 50 (representing the line between 
 expansion and contraction), after dropping below 50 in 
 January and February.  The PMI index is a leading 
 indicator of the official data compiled by Statistics SA, 
 which will release its data for March next week.  The 
 manufacturing sector accounts for 16% of GDP and is the 
 second-largest sector of the economy after financial and 
 businesses services.  The main contributor to the rise in 
 
PRETORIA 00001811  002 OF 003 
 
 
 the PMI was an acceleration in new sales orders, which 
 indicates the prospect of positive conditions ahead. 
 Output activity also rose for the second month in a row. 
 Increased production did not, however, translate into 
 increased employment, with a decline in the employment 
 subindex of the PMI to 47.9 from 48.2 in March suggesting 
 further job losses in the manufacturing sector.  The 
 latest Statistics SA manufacturing data showed a slowing 
 in quarterly growth in February, leading to speculation 
 about possible interest rate reductions.  The latest PMI 
 index points to a recovery in manufacturing activity, 
 ruling out future interest rate reductions, especially 
 given South African Reserve Bank Governor (SARB) Mboweni's 
 recent statements that the SARB's bias is now towards 
 higher rates.  Source:  Reuters and Business Day, May 3. 
 
 Competition Complaints Increase 
 ------------------------------- 
 
 ¶5.  Based on a study by French and Swiss competition 
 analysts, allegations of anticompetitive behavior in sub- 
 Saharan Africa have increased to 365 in a two-year period 
 from 2002-2004, compared to 252 allegations over the 
 previous six years.  South Africa accounted for 30% of the 
 total number of complaints.  Most complaints occurred in 
 five sectors:  food, telecommunications, petroleum, air 
 transport and chemicals.  The study also found that 
 allegations of monopolistic practices, price fixing, and 
 cartels were increasing across the region.  According to 
 the study, fewer than 30% involved foreign firms, with 
 most allegations against domestic or regional 
 corporations.  Source:  Business Day, May 3. 
 
 Financial Stability Review Warns About Impacts of Interest 
 Rate Rise 
 --------------------------------------------- ------------- 
 
 ¶6.  The latest South African Reserve Bank's (SARB) 
 biannual Financial Stability Review warns about the impact 
 of higher interest rates on consumer debt, reinforcing the 
 idea that future interest rate hikes are more likely than 
 reductions.  The Review stated that although banks and 
 their clients are currently able to cope with record 
 levels of household debt, this might change.  The Review 
 pointed out that in the fourth quarter 2005, household 
 debt to disposable income reached 65.6%, compared with 
 63.5% in the third quarter and 62% in 1997.  Low interest 
 rates and inflation allowed households to use a relatively 
 small fraction of their disposable income to service their 
 increased debt.  However, the SARB pointed out that signs 
 of change in the ability of borrowers to repay mortgage 
 loans.  Mortgage loans overdue (those that are more than 
 180 days overdue and either inadequately secured or 
 uncollectible) increased by 5.5% in the year to February 
 2006, while the ratio of overdue mortgage loans to total 
 mortgage advances increased from 1% in the third quarter 
 2005 to 1.2% in the fourth quarter.  SARB expects that the 
 demand for housing will continue to be supported by rises 
 in disposable income, favorable financial conditions and 
 structural changes in the economy, while noting that a 
 sudden increase in the cost of credit could cause problems 
 for overly indebted households.  The Review also notes 
 additional potential risks to the financial system 
 stability of high and volatile energy prices, global 
 imbalances and abnormally high residential property 
 prices.  Source:  Business Report, May 4. 
 
 Car Sales Increase 12.7% in April 
 --------------------------------- 
 
 ¶7.  According to the National Association of Automobile 
 Manufacturers of SA (NAAMSA), domestic vehicle sales rose 
 in April at an annual rate of 12.7% to 45,635 units, due 
 to continued strong consumer spending.  Quarterly domestic 
 sales were 19.5% ahead of the same period in 2005, above 
 expectations and leading industry analysts to revise 
 growth prospects to between 15% and 20% from 10%.  Vehicle 
 export sales for the first three months of the year grew 
 by 57.6% to 38,541 units.  The vehicle segment accounting 
 for most of the growth last month was heavy trucks, which 
 increased 23% compared with the same month in 2005. 
 Medium commercial vehicles, considered an indicator of 
 small business activity, grew 20.7% compared to April 
 ¶2005.  Passenger cars grew by 13.9% and light commercial 
 vehicles increased by 8.3%  The automotive industry, 
 
PRETORIA 00001811  003 OF 003 
 
 
 including component manufacturing and after sales products 
 and services, contributes more than 7% to South Africa's 
 GDP.  Source:  Standard Bank's Motor Alert, May 3; 
 Business Report, May 4. 
 
 Retail Sales Continue to Show Strong Growth 
 ------------------------------------------- 
 
 ¶8.  According to Statistics SA, real retail sales grew by 
 10.4% in February, compared to January's growth of 6.9%. 
 This was the strongest year-on-year increase since the end 
 of 2004, and the first time that positive month-on-month 
 growth was recorded in February since the introduction of 
 the new retail sales series in 1999.  Despite the surge, 
 economists expected interest rates to remain unchanged for 
 the rest of 2006 as the CPIX indicator (consumer inflation 
 excluding interest costs on mortgages) was still well 
 within the South Africa Reserve Bank's 3%-6% target range. 
 Growth in retail spending was supported by rising real 
 disposable income levels, lower interest rates, continued 
 personal income tax relief since 1995, welfare and 
 dependency grants to more than 10 million South Africans, 
 and high consumer confidence.  Source:  Standard Bank's 
 Taking Stock, May 3; Reuters and Business Report, May 4. 
 
 TEITELBAUM