VZCZCXRO5719
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #2261/01 1530837
ZNR UUUUU ZZH
R 020837Z JUN 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3778
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 002261 
 
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 JUNE 2 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: 
 
 -  First Quarter GDP Growth Accelerates; 
 -  April Credit Growth Slows; 
 -  China, SA Conclude Draft Agreement to Restrict Textile 
 Exports; 
 -  SA Trade Deficit Reaches R2.4 Billion; 
 -  Koeberg's Unit 1 Operational; 
 -  Eskom Spending a Brake on Increased SA Growth; and 
 -  Manufacturing Recovers. 
 End Summary. 
 
 First Quarter GDP Growth Accelerates 
 ------------------------------------ 
 
 ¶2.  Economic growth accelerated to 4.2% in the first 
 quarter 2006, after 3.2% growth during the last quarter 
 2005, according to Statistics SA.  First quarter 2006 
 growth was the 30th consecutive quarter of economic 
 growth, the longest continuous growth phase in South 
 Africa's history.  The highest growing sector was the 
 construction sector, which, although it makes up only 2.8% 
 of total output, grew 13.7%, compared to 12.4% during the 
 fourth quarter 2005.  The manufacturing sector showed a 
 sharp improvement, growing by 4.3% compared to 4th quarter 
 2005 contraction of 0.3%.  Other sectors showing 
 substantially higher growth in the first quarter 2006 
 include the finance and real estate at 8.8% compared to 
 fourth quarter 2005 growth of 3.7%.  The finance sector 
 makes up 19.5% of South Africa's economy.  However, the 
 primary sectors of the economy, agriculture and mining, 
 contracted.  The mining sector, which contributes 6.3% of 
 GDP, declined only 2.9% compared to fourth quarter's 
 decline of 5.4%.  Despite the commodities boom, the mining 
 sector is now officially in recession, having contracted 
 for three consecutive quarters, by 3.4% and 5.4% in the 
 last two quarters 2005 and by 2.9% in the first quarter 
 ¶2006.  Table 1 shows growth rates in the first quarter 
 2006 and fourth quarter 2005 for South Africa's major 
 industrial sectors and indicates that the services sector 
 continues to fuel South Africa's GDP growth. 
 
 Table 1. 
 Quarterly Growth, Fourth Quarter 2005   First Quarter 2006 
 Primary Sector                   -2.7%               -4.1% 
 Agriculture                       3.9%               -6.9% 
 Mining                           -5.4%               -2.9% 
 Secondary Sector                  1.7%                5.5% 
 Manufacturing                    -0.3%                4.3% 
 Electricity/Water                 3.5%                3.6% 
 Construction                     12.4%               13.7% 
 Services Sector                   3.2%                4.2% 
 Wholesale/Retail Trade            9.0%                5.1% 
 Transport/Communication           6.5%                4.9% 
 Finance/Real Estate               3.7%                8.8% 
 Personal Services                 2.9%                3.4% 
 Government                        1.9%                1.2% 
 GDP                               3.2%                4.2% 
 Source:  Investec's GDP Update, May 30; Business Day and 
 Business Report, May 31. 
 
 April Credit Growth Slows 
 ------------------------- 
 
 ¶3.  Growth in M3, the broadest measure of money supply, 
 slowed to 23% (y/y) compared to March's growth of 26.8%. 
 Growth in private sector credit extension (PSCE) slowed to 
 23.2% y/y in April, from 24.3% during March.  Installment 
 sales credit increased by R1.7 billion, or 18.4% y/y, and 
 leasing finance rose by R741 million.  Mortgage advances 
 were up R11 billion, showing a 30.1% y/y increase.  Other 
 loans and advances, mainly corporate overdrafts and credit 
 card debt, slowed to a growth rate of 15.6% (18.8% 
 previously).  JPMorgan economist Marisa Fassler expects 
 the South African Reserve Bank (SARB) to increase interest 
 rates by 25 basis points, especially if the SARB's 
 inflation forecasts were revised upwards to reflect a 
 weaker rand and the second quarter inflation expectations 
 came in higher due to higher petrol prices over the past 
 few months.  The SARB's Monetary Policy Committee meets on 
 
PRETORIA 00002261  002 OF 003 
 
 
 June 7 and 8th and the Bureau for Economic Research will 
 release its second quarter inflation expectations survey 
 on June 8th.  Source:  Business Day, May 31. 
 
 China, SA Conclude Draft Agreement to Restrict Textile 
 Exports 
 --------------------------------------------- --------- 
 
 ¶4.  China and South Africa concluded a draft agreement to 
 restrict Chinese textile exports to South Africa according 
 to the Chinese government.  The agreement had been 
 circulated by South Africa's Department of Trade and 
 Industry to its textile industry for comment, said Zhou 
 Yabin, the Director-General for West Asia and Africa in 
 the Ministry of Commerce.  China is addressing local 
 concerns about strong competition from Chinese textile 
 imports by encouraging its textile enterprises to reduce 
 their investments and production in China and to focus 
 more on high-quality textiles and clothing as this would 
 reduce direct competition with African producers of lower- 
 quality goods.  Making conditional loans is another 
 incentive to encourage more production abroad.  Zhou 
 believed the concerns of textile producers, especially in 
 South Africa, lay behind the hesitation by the SA Customs 
 Union (SACU) countries to conclude negotiations for a 
 China-SACU free trade area.  An agreement was supposed to 
 have been reached by the end of 2004, but negotiations are 
 still continuing.  Source:  Business Report, May 30. 
 
 SA Trade Deficit Reaches R2.4 Billion 
 ------------------------------------- 
 
 ¶5.  South Africa's trade deficit improved slightly to R2.4 
 billion in April compared to March's deficit of R2.9 
 billion, according to the South African Revenue Service 
 (SARS).  A Reuters poll of economists forecasted a trade 
 deficit of R2 billion.  Exports decreased by 11.5% m/m to 
 R26.5 billion in April from R29.95 billion in March, while 
 imports declined by 11.9% m/m to R28.93 billion from R32.8 
 billion in March.  Domestic demand is relatively healthy 
 with the current level of imports close to the average 
 monthly increase of around R29 billion in 2005.  The 
 cumulative deficit for the first four months of the year 
 amounted to R17.13 billion versus a deficit of R4.9 
 billion in the same period in 2005.  Exports of mineral 
 products, machinery, precious metals and chemicals and 
 imports of vehicles, machinery, mineral products and 
 instruments declined during April.  The South Africa 
 Reserve Bank's import cover ratio (which excludes foreign 
 currency held by all other monetary authorities) increased 
 to 20.2 weeks (5 months) in April from 17.4 weeks (4.3 
 months) in March.  Source:  Standard Bank Foreign Trade 
 Alert and Reuters, May 31. 
 
 Eskom Spending a Brake on Increased SA Growth 
 --------------------------------------------- - 
 
 ¶6.  In testimony to Parliament, Eskom officials admitted 
 that underspending on new generating capacity presented a 
 constraint on increased growth in the economy and meant 
 that its electrification program might fail to meet the 
 program's targets.  Brian Dames, a managing director at 
 Eskom's enterprises division, said that Eskom's R84 
 billion ($13 billion using 6.5 rands per dollar) capital 
 expenditure plans were based on an expectation of only 4% 
 economic growth.  With 4% growth, Eskom (a government- 
 controlled energy utility) expected electricity would 
 increase by 2.3%.  The South African government is aiming 
 for 6% growth which would mean that electricity demand 
 growth to reach 4.4%.  At the World Economic Forum (WEF) 
 in Cape Town, Steve Lennon, Eskom's Managing Director for 
 Resources and Strategy, said that South Africa's target of 
 universal electrification by 2012 could only be met if 
 Eskom spent an additional R9 billion ($1.4 billion) on the 
 program.  From 1994 to 2004, more than 3 million homes had 
 been electrified.  Rural and semi-urban areas have the 
 most gaps in coverage.  Source:  Business Report, June 1. 
 
 Manufacturing Recovers 
 ---------------------- 
 
 ¶7.  Investec's South Africa's Purchasing Managers Index 
 (PMI) rose to 57.6 in May from April's 54.3, confirming a 
 recovery in the manufacturing sector due to buoyant 
 
PRETORIA 00002261  003 OF 003 
 
 
 domestic demand growth.  It was the third month in 2006 
 that the index has been above the 50 level that divides 
 growth and contraction, after dropping below 50 in January 
 and February.  The price component of the PMI rose to 68.8 
 in May from 66.9 in April, suggesting the recent increase 
 in producer inflation (PPI) may continue.  The business 
 activity component rose to 60.3 from 55.5 in April, with 
 new sales orders increasing to 63.7 from 58.1.  More 
 positive was the employment index reaching 50.3 in April 
 from 47.9, further evidence that the economy was creating 
 jobs.  Respondents' short-term expectations regarding 
 general business conditions improved to 69.9 in May from 
 68.1 in April.  Source:  Reuters, June 1. 
 
 
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