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UNCLAS SECTION 01 OF 03 PRETORIA 002701
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DEPT FOR AF/S/JDIFFILY; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
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E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
July 8 2005 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:
- Rand, Oil Prices Offset Inflation Good News;
- June Forex Reserves Leap, Helped by FDI;
- Falling Interest Rates Lift Credit Demand to 15-year
High;
- Employment Fell in First Quarter 2005;
- COSATU Strike Fails to Halt Rand's March;
- Record Portfolio Inflow in Second Quarter; and
- April Leading Indicator Up 1.8%.
End Summary.
Rand, Oil Prices Offset Inflation Good News
-------------------------------------------
2. Consumer inflation came in well below market
expectations, but with oil prices trending higher and the
rand weakening, it was unlikely that the Reserve Bank would
lower interest rates in August. Figures released by
Statistics South Africa showed that CPIX (consumer price
inflation less mortgage costs), the Reserve Bank's targeted
measure of inflation, rose 3.9% year-on-year in May, and
0.2% month-on-month. The main contributors to May's rise in
consumer inflation were increases in the price indices for
housing (excluding interest rates on mortgage bonds) and the
index for transport, which recorded increases of 1.2% and
1.3%, respectively, during the month. The better-than-
expected CPIX figures failed to nudge the rand to firmer
levels. The rand fell 1.6% to R6.72 against the dollar,
from its previous close of R6.62. Standard Bank economist
Monica Ambrosi said that although overall inflation
pressures have been relatively muted for more than a year,
the transport component has been almost a consistent source
of upward pressure on the back of a volatile oil price.
Food prices remain muted, with prices falling 0.1% month-on-
month, from a 0.1% rise in April. Core inflation slowed to
3.3% year-on-year, from 3.4% in April. Source: Business Day,
June 30.
June Forex Reserves Leap, Helped by FDI
---------------------------------------
3. South Africa's net gold and foreign exchange reserves
jumped by nearly $1.5 billion to $15.2 billion during June,
boosted in part by inflows of foreign direct investment
(FDI), the Reserve Bank said. Gross reserves jumped to
$18.7 billion from $17.2 billion in May. Markets speculated
the forex increase was fuelled in part by transactions
related to the planned acquisition by Britain's Barclays
bank of a majority stake in ABSA, but analysts said this was
unlikely given the deal's timetable. The settlement date
for the R33 billion ($5.1 billion) deal has been moved to
July 27 from July 13. Other potential inflows that could
have affected reserves were a payment last month to Kumba
(the continent's biggest iron ore producer) of R1.2 billion
($185 million) for the repurchase of Kumba's share of the
Hope Downs iron mine in Australia or foreign purchases of
R11.8 billion ($1.8 billion) of equities during June. The
Reserve Bank has repeatedly said it would buy dollars
cautiously, to avoid affecting the value of the rand. Gold
reserves rose to $1.74 billion from $1.66 billion at the end
of May due to higher gold prices. The surge in reserves
during June, which followed a $1.2 billion increase in May,
took the country's import cover to about 4 1/2 months,
analysts said. Source: Business Day, July 7.
Falling Interest Rates Lift Credit Demand to 15-year High
--------------------------------------------- ------------
4. Low inflation and low interest rates fueled demand for
credit nearly to 15-year highs, strengthening the case
against a rate cut when the Reserve Bank's monetary policy
committee meets next month. Economists said that from an
inflation point of view, the figures, taken together with
high oil prices and a weaker rand, should be worrying for
the Reserve Bank. Interest rates, at 24-year lows, have
spurred consumer spending to record levels, as it has become
more affordable to borrow money to finance purchases.
Producer price inflation (PPI) also came in above market
expectations, largely on the back of higher international
oil prices. The PPI, which tends to lead consumer inflation
by a few months, rose sharply to 2.4% year on year in May,
against a 1.8% rise in April. Economists said the strong
growth in monetary aggregates counted against further
monetary stimulus and another interest rate reduction.
Private sector credit extension and money supply increased
slightly above market expectations. Private sector credit
extension jumped 22.9%, to just more than R1 trillion ($154
billion) in May, compared with an increase of 20.4% in
April, spurred mainly by mortgage advances and leasing
finance. The broadest measure of money supply, M3, rose to
16.3% year-on-year in May, or R983 billion ($151 billion),
from a revised increase of 15.0% in April, driven mainly by
claims on the private sector. Standard Bank economist
Shireen Darmalingam said the revision was also due to the
reclassification of the Public Investment Corporation (PIC).
The PIC, which was previously not classified as part of the
monetary banking sector, will now have its deposit
liabilities, which contribute about 40% to total government
deposits, included in the M3. Source: Business Day, July 1.
Employment Fell in First Quarter 2005
-------------------------------------
5. Employment in the non-agricultural sector fell
unexpectedly by 136,000 jobs in the first quarter of 2005,
casting doubt on the success of efforts to reduce the steep
jobless rate. An expanded employment survey published by
Statistics South Africa (Stats SA) showed that employment in
the formal business sector fell 1.9% in the first three
months of the year, compared with the last quarter of 2004.
Patricia Koka, Stats SA's senior statistician said the
decline in employment from 7,075,000 at December 2004 to
about 6,939,000 workers in March was probably because of a
fall-off in the number of seasonal workers employed. Data
released earlier this year showed the unemployment rate
dipped to 26.2% last September from 27.9% in March 2004,
with 250,000 jobs created. Employment in the biggest
sector, financial and real estate, fell sharply in the first
quarter, dropping by 125,000 jobs, or 8.1%. Jobs in the
retail and hotels sector dipped by 2.2%, while there were
also declines in mining and manufacturing, the areas hit
hardest by rand strength. Sectors where jobs increased
included construction, electricity, gas, and water. Source:
Business Report, June 29.
COSATU Strike Fails to Halt Rand's March
----------------------------------------
6. Nationwide protests by the Congress of South African
Trade Unions (COSATU) on June 27 in favor of a weaker rand
failed to move the markets, with the local currency actually
strengthening against the dollar. Several major mining
houses, retailers, and companies in other industries
reported considerably reduced operations, but analysts said
it would take time before the full effect of the strike was
felt. The strike was organized in part to protest against
job losses resulting from the currency's strength, largely
in mining and manufacturing, which together make up 23% of
gross domestic product (GDP). Unemployment in South Africa
is officially estimated at about 26%, but unions say that
the figure is much higher - closer to 40%. The production
side of the economy has shed hundreds of jobs as a result of
the firm local currency, which has made it difficult for
exporting companies to remain profitable. COSATU has
proposed that retailers stock 75% local goods and cut back
on imports, and that government pursue local procurement
policies while reviewing its trade strategy. It also wants
local authorities to halt the privatization of basic
services. Government dismissed calls for a devaluation,
with Trade and Industry Minister Mandisi Mpahlwa saying that
South Africa had to look beyond the value of the rand in
seeking to boost competitiveness. Mpahlwa also said that he
was "not inclined to artificial measures to influence the
currency." According to the South African Chamber of
Business (SACOB), about 10% of the country's workers took
part in the strike, costing the economy an estimated R500
million ($77 million). Source: Business Day, June 28.
7. Comment: Finance Minister Trevor Manuel conceded that a
strong rand was worrying for exporters, but went on to say,
"I don't control the rand." Manuel thinks that the unions
need a "different approach" and that the government should
work with the unions to develop "a commonality of
perspectives" to address their concerns. End Comment.
Record Portfolio Inflow in Second Quarter
-----------------------------------------
8. Foreigners bought a record net R26.8 billion ($4.1
billion) worth of South African stocks and bonds in the
second quarter 2005 after buying only a net R7.9 billion
($1.2 billion) in the first quarter 2005. The split between
bonds and equities was almost equal with a net R12 billion
($1.8 billion) worth of purchases of bonds after net sales
of R1.3 billion ($200 million) rand in the first quarter,
while net equity purchases amounted to R14.8 billion ($2.3
billion) after net purchases of R9.2 billion ($1.4 billion)
in the first quarter. The previous record quarterly
portfolio inflow into South African financial markets was in
the fourth quarter 2004, when foreigners bought a net R24.7
billion ($3.8 billion). Source: I-Net Bridge, July 1.
April Leading Indicator Up 1.8%
-------------------------------
9. South Africa's April 2005 leading economic indicator,
which is compiled by the South African Reserve Bank (SARB),
rose by 1.8% month-on-month (m/m) after a 1.0% m/m increase
in March, but was still below the December 2004 level. Of
the 13 leading indicator components in April, eight were
positive, three were negative, and two were unavailable.
The positive factors were average manufacturing hours
worked, job advertising space, manufacturing orders,
business confidence, the inventory/sales ratio, the interest
rate spread between the money market and capital market
instruments, building plans approved, and real M1 money
supply. The negative factors were equity prices, commodity
prices, and the composite leading indicator of major trading-
partner countries. The unavailable data was for
manufacturing labor productivity and the gross operating
surplus as a percentage of GDP. On a year-on-year basis,
the leading indicator rose 1.5% in April, up from 0.2% in
March. The South African economy is currently in its 71st
month of a record upturn, as the current expansion started
in September 1999. Source: I-Net Bridge, June 30.
FRAZER