VZCZCXRO1774
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #2768 1881102
ZNR UUUUU ZZH
R 071102Z JUL 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4391
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS PRETORIA 002768 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND 
TREASURY FOR OAISA/BCUSHMAN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV SF
SUBJECT: Emerging Market Jitters Weaken Rand, Inflation Diminishes 
Growth Prospects 
 
REF: Pretoria 2395 
 
Sensitive but Unclassified; Protect Accordingly.  Not For Internet 
Distribution. 
 
¶1. (SBU) Summary.  Emerging market jitters in May and June led to a 
roughly 20 percent depreciation in the rand, contributing to a 
growing current account deficit and higher inflation.  As a result, 
growth in 2006 will likely be below the government's forecast of 4.9 
percent.  Other than contributing to slower growth, the emerging 
market weakness has had relatively little negative effect.  The 
current account deficit, financed primarily by short term capital 
flows, is the key vulnerability.  End Summary. 
 
¶2. (U) Declining commodity prices, particularly gold, and cooling 
investor interest in emerging markets led to the first notable 
deprecation in the rand in over three years.  The rand began May at 
approximately R6/$, hit R7.5/$ in late June and closed the month at 
roughly R7.2/$.  Citing an unstable international environment, local 
analysts are reserving judgment on the future direction of the rand. 
 Few expect export growth to pick up in the short term. 
 
¶3. (U) In early June the South African Reserve Bank's Monetary 
Policy Committee (MPC) raised its repurchase (repo) rate 50 basis 
pionts, noting that it expected inflation to breach the upper end of 
its target range of 3-6 percent (reftel).  Subsequent data releases 
support the prediction of higher inflation, largely due to high oil 
and food prices.  The CPIX (CPI minus mortgage costs) rose 4.1 
percent in May, up from 3.7 percent in April.  The PPI also rose 5.9 
percent in May from 5.5 percent in April. 
 
¶4. (U) In raising the repo rate, the MPC also cited a sharp increase 
in the current account deficit, which registered 6.4 percent of GDP 
in the first quarter, against 4.5 percent in the fourth quarter of 
2005 and the widest in two years.  StatsSA subsequently reported 
that the trade deficit hit R7 billion in May.  Higher oil prices and 
strong consumer demand pushed imports up 30 percent, while exports 
grew 15.6 percent.  Analysts had expected a trade deficit of about 
R2 billion. 
 
¶5. (SBU) The Reserve Bank's Monetary Policy Committee meets again in 
August.  Given continued inflationary pressure and current account 
weakness, analysts expect another rate hike, probably 50 basis 
points.  The higher interest rates will likely restrain consumer 
spending, a key factor in South Africa's recent strong growth. 
 
¶6. (SBU) Growth is already showing signs of a slow down.  The 
Reuters Econometer Confidence Index fell to a 14-month low of 258 in 
June. The SACOB Business Confidence Index fell below 100 (neutral) 
in June, and the FNB/BER consumer confidence index also fell 
slightly, from 21 to 20.  The rate of growth in housing price 
increases slowed to four and a half year low of 13.6 percent (y/y) 
in June, while the growth rate for new vehicle car sales continued 
to slow, dropping to 13.8 percent (y/y) in June.  While both rates 
are still healthy, there are sharply below levels of a year ago. 
Analysts expect growth this year to be below the government's 
official projection of 4.9 percent: they are currently estimating in 
the neighborhood of 4.2 percent, healthy but short of the 
government's objective of 6 percent. 
 
¶7. (SBU) Ratings agencies Standard and Poor's and Fitch have 
recently completed their annual reviews of the South African 
economy.  Both are uncertain about short term direction of the 
economy and are cautious about another ratings upgrade this year. 
Fitch noted that "we need to see how this volatility is managed 
..." 
 
¶8.  (SBU) Comment.  South Africa's economic fundamentals remain 
sound.  Emerging market weakness has contributed to slower growth 
but otherwise has had relatively little negative effect.  Also, 
there are so far no signs of increased political risk premiums due 
to the emerging debate on succession to President Mbeki.  Still as a 
small, open economy South Africa remains susceptible to the 
vagrancies of international views on emerging markets.  The current 
account deficit is the key vulnerability.  Financed primarily by 
short term capital flows, a large movement out of emerging markets 
could put renewed pressure on the rand, undermine confidence and 
further lower growth.  TEITELBAUM