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UNCLAS SECTION 01 OF 04 PRETORIA 005158
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E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
NOVEMBER 26, 2004 ISSUE
1. Summary. Each week, AMEmbassy 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:
- October Consumer Prices Slightly Higher than Market
Expectations;
- Producer Prices Show Mild Gain;
- BER Expects SA Growth to Exceed 4 Percent in 2005;
- Limpopo Study Aims to Increase Food Production;
- Leading Economic Indicator up 9.3 Percent;
- Erwin Clarifies Listing of New State IPOs;
- Interest Rate Reduction More Likely in Early 2005;
- Signs of Strong Domestic Investment; and
- Over Half of South Africans are Living in Poverty.
End Summary.
OCTOBER CONSUMER PRICES SLIGHTLY HIGHER THAN MARKET
EXPECTATIONS
--------------------------------------------- -------
2. In October, targeted inflation (CPIX, consumer prices
excluding mortgage costs) increased by 4.2 percent (y/y),
slightly higher than the 4.1 percent growth Reuter's
market consensus forecast. October's overall consumer
prices increased by 2.4 percent (y/y) compared to
September's growth of 1.3 percent. Higher food, fuel and
power and transport prices were why October's CPIX
inflation was higher than September's 3.7 percent. Rising
meat, fruit and vegetable prices pushed up food costs in
October and food prices are expected to rise as a result
of adverse weather conditions (drought has lasted over two
years) and rising global food prices. Source: Standard
Bank, CPI Alert, November 24; Business Day, November 25.
PRODUCER PRICES SHOW MILD GAIN
------------------------------
3. October producer prices increased 1.9 percent (y/y),
slightly higher than market expectations of 1.8 percent
and an increase of 0.5 percentage points over September's
producer price inflation. Domestic producer prices
increased 2.7 percent while imported producer prices
showed a 0.3 percent decline. In October, the sharp
increase in oil prices contributed 0.6 percent to the
month/month increase in producer price inflation, with oil
price contribution strong in plastics, chemicals and
petroleum products. Increases in oil prices in the
domestic economy should be lower in November as the rand
remains strong and the global oil prices have retreated
from recent highs. Source: Investec, PPI Update;
Standard Bank, PPI Alert, November 25; Business Day,
November 26.
BER EXPECTS SA GROWTH TO EXCEED 4 PERCENT IN 2005
--------------------------------------------- ----
4. The University of Stellenbosch's Bureau for Economic
Research (BER) expects South African economic growth to
exceed four percent in 2005, helped by strong consumer and
investment demand. Although growth should be higher than
this year's expected 2.9 percent, exports should show slow
growth next year because of the rand's strength. BER
expects that growth in consumer spending would slow next
year to around 3.7 percent down from 4.1 percent in 2004,
while investment was set to increase by 9 percent next
year compared to 8.4 percent this year. BER forecasts the
rand to weaken to around R7.50-R8 against the dollar in
2005, given South Africa's widening current account
deficit. Economist Mike Schussler forecasts that growth
will rise above 4 percent over the next two years, with
record growth in economic activity likely to continue
until 2010, when South Africa hosts the Soccer World Cup.
Source: Business Day and I-Net Bridge, November 19.
LIMPOPO STUDY AIMS TO INCREASE FOOD PRODUCTION
--------------------------------------------- -
5. Half of Africa's population will face water stress or
scarcity by 2025. For the next five years, researchers
will study the way farmers along the Limpopo basin through
Zambia, Botswana, Zimbabwe, Mozambique and SA collect and
manage water. The $5 million World Bank-funded research
project will examine how the river basin could be a more
reliable producer of food for the 14 million people
surrounding the river. According to Adriaan Louw of the
South African Agricultural Research Council, which is
coordinating the research project, about 10 percent of the
population was expected to abandon their homes and migrate
south in the next five years. The poverty of people
living in the Limpopo basin makes them susceptible to
failures in the water supply. In dry years, some
stretches of the river only see water flowing for 40 days
and pollution and competition for usable water can prevent
efficient use. The Limpopo is one of nine river basins
the researchers will study. As well as gathering
information about the problems, they will introduce
different farming methods to ensure better management of
soil and water. Small farmers, who rely on seasonal rains
making them vulnerable to the frequent floods and
droughts, do much of the farming in the Limpopo basin.
Source: Business Day, November 19.
LEADING ECONOMIC INDICATOR UP 9.3 PERCENT
-----------------------------------------
6. South Africa's September 2004 leading economic
indicator rose by 9.3 percent (y/y), according to the
South African Reserve Bank (SARB), compared to August's
y/y change of 10.7 percent. In September, four leading
indicator components showed slower growth and three showed
higher. Interest rate spreads between the money market
and capital market instruments, commodity prices, and the
leading indicator of major developed countries contributed
to slower September growth while job advertisements,
average manufacturing hours worked, equity prices and real
M1 money supply growth showed higher growth. The
coincident indicator is up 20.2 percent y/y in August
compared to 18.7 percent y/y in July. This increase
reflects the strong growth in domestic activity and is at
its highest y/y growth since 1995. In March 2004, the
SARB revised its leading and coincident business cycle
indicators. The SARB first published business cycle
indicators in 1983. These indicators were revised in 1994
and have now been revised again. The leading indicator
has been reduced to 13 components from 21, while the
coincident indicator has been cut to 5 from 7. The new
indicators are less volatile than the old indicator, while
the lead for the leading indicators has been extended to
15 months from the previous 11.5 months at the peak and
five months at the trough. Source: I-Net Bridge November
22.
ERWIN CLARIFIES LISTING OF NEW STATE IPOS
-----------------------------------------
7. Public Enterprises Minister Alec Erwin launched this
week the IPO Reference Manual, a guide for upcoming share
sales of state assets. The Public Enterprises Department
said it viewed IPOs as one option available in the
restructuring of state-owned enterprises. Erwin said
parastatals would need to meet conditions for listing. "An
IPO would be considered when the corporate structure and
balance sheet of the state-owned enterprise is strong, and
where we see the opportunity of lowering the cost of
capital through an IPO; however, no IPOs are envisaged
this financial year," he said. He expects concessions,
joint ventures and public-private partnership arrangements
to continue in the next year. Although government would
retain strategic control of power utility Eskom, national
carrier South African Airways and Transnet, parts of these
parastatals could be partially listed as their balance
sheets and corporate structures become stronger. Airports
Company SA (ACSA), which owns and operates 10 of South
Africa's major airports, will be sold next year. ACSA was
the first parastatal to be partially privatized when
Italian operator Aeroporti di Roma paid R918 million for
its 20 percent share in 1998. The transport department
has scheduled a shareholders' meeting for December to
discuss the sale of shares in the company and details
should be announced by the end of the year. Aeroporti di
Roma is expected to exercise its option to buy another 10
percent in the company. Government owns 76 percent of
ACSA, while five empowerment consortia collectively own 4
percent. Source: Business Report, Business Day and I-Net
Bridge, November 23.
INTEREST RATE REDUCTION MORE LIKELY IN EARLY 2005
--------------------------------------------- ----
8. The next South African Reserve Bank's Monetary Policy
Committee (MPC) meeting, scheduled for December 8 and 9,
promises to surprise either financial markets or
economists, reflecting divided views. The MPC could cut
the repurchase rate by 50 basis points, as reflected by
forward rates, which are now pricing in close to a 100
percent probability of a 50 basis point rate cut.
Alternatively, the bank may leave rates unchanged. The
Reuters consensus forecast indicates that most economists
believe this will be the outcome. The major factor in
support of a rate cut is the low inflation rate, which has
been supported by the strong rand. CPIX, the bank's
official inflation measure, reached a low of 3.7 percent
in October, and although it is expected to increase from
this level, there is consensus that it will remain within
the target range of 3 percent to 6 percent in the next two
years. The currency broke the key R6 to the dollar level
this month, supported by improving South African
macroeconomic variables and dollar weakness. Reuters
forecasts indicate that most economists believe the rand
will weaken steadily in the near to medium term. If
currency strength persists, there is a risk the bank might
undershoot the inflation target. However, the bank has
explicitly said it would not intervene, so it seems a rate
cut may be the only option available to weaken the
currency. Factors not supportive of another rate cut
include continuing strong consumer demand and high oil
prices. Over the past few months there has been a retail
and vehicle sales point to robust consumer demand.
Private sector credit extension is at high levels, meaning
consumers are borrowing in order to spend, and this tends
to be inflationary. Since consumer demand is normally
quite high during December, it implies that an interest
rate cut at this meeting would add fuel to consumer
spending and credit demand. For these reasons, analysts
believe that the MPC will wait until early 2005 to change
interest rates, even with a strong currency. Source:
Business Day, November 23.
SIGNS OF STRONG DOMESTIC INVESTMENT
-----------------------------------
9. Domestic fixed investment shows signs of increasing at
record levels over the next several years. The announced
private sector investment plans include: R 5 billion
($830 million using 6 rands per dollar) over the next five
years by SAB (part of SABMiller), SASOL (an oil company)
with capital spending at R 15 billion ($2.5 billion), PPC
(a cement company) spending R1 billion ($170 million); and
investment by vehicle manufacturers reaching a five-year
high of R3.5 billion ($580 million) in 2004. Public
enterprise investment spending should also increase
briskly. Eskom (the electricity parastatal) and Transnet
(transportation public enterprise) are expected to spend
R165 billion ($27.5 billion) improving South Africa's
infrastructure. Source: Business Day, November 23.
OVER HALF OF SOUTH AFRICANS ARE LIVING IN POVERTY
--------------------------------------------- ----
10. Fifty-seven percent of South Africans are living
below the poverty line, according to a recent study by the
Human Sciences Research Council (HSRC). Based on data
gathered in the 2001 census, the report said the provinces
with the highest proportion of poor people were Limpopo
(77 percent) and Eastern Cape (72 percent). Western Cape
and Gauteng had the fewest proportion of poor with 32
percent and 42 percent, respectively.
The poverty gap, which is the amount it would take to
bring the income of the poor up to the poverty line,
increased from R56 billion in 1996 to R81 billion
currently. KwaZulu-Natal, at R18 billion, has the largest
poverty gap, followed by Eastern Cape and Gauteng.
Gauteng's poverty gap grew faster than other provinces
because the area's population has grown faster than its
economy. The poorest municipality was Ntabankulu in the
Eastern Cape where 85 percent of people lived below the
poverty line. Municipalities with the lowest poverty
rates included Stellenbosch (23 percent) and Saldanha Bay
(25 percent) in Western Cape. Of the large cities, Cape
Town had the fewest poor people at 30 percent, followed by
Pretoria (35 percent) and Johannesburg (38 percent).
Source: Sunday Times, November 21; Allafrica.com,
November 23.
11. Comment. The HSRC study's poverty line is based on
the Bureau of Market Research's minimum living level in
2001. The poverty line varies according to household
size; the larger the household, the larger the income
required to keep it out of poverty. The poverty income by
household size in 2001 used in this study was:
Household Size, Rands per Month (6 rands per $)
1 587 ($98)
2 773 ($129)
3 1028 ($170)
4 1290 ($215)
5 1541 ($257)
6 1806 ($300)
7 2054 ($340)
8+ 2503 ($417)
End comment.
FRAZER