This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PRETORIA 005506 
 
SIPDIS 
 
DEPT FOR AF/S/JDIFFILY; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR OAISA/BARBER/WALKER/JEWELL 
USTR FOR COLEMAN 
LONDON FOR GURNEY; PARIS FOR NEARY 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT:  SOUTH AFRICA ECONOMIC NEWSLETTER 
           DECEMBER 23, 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: 
 -  Consumer Prices Increase Slightly Above Expectations; 
 -  Western Cape Looks at Increasing Taxes; 
 -  ICASA Proposes New Price Cap; 
 -  Strong Rand May Subdue Inflation; 
 -  Court Rules Against Pharmaceutical Pricing Regulations; 
 and 
 -  South Africa's Leading Business Indicator Still 
 Increasing. 
 End Summary. 
 
 CONSUMER PRICES INCREASE SLIGHTLY ABOVE EXPECTATIONS 
 --------------------------------------------- ------- 
 
 ¶2.  In November, both overall consumer prices (CPI) and 
 targeted inflation (CPIX, consumer prices less mortgages) 
 increased above market expectations and above last month's 
 inflation.  CPI and CPIX increased 3.7 percent (y/y) and 
 4.6 percent, slightly above the market expectations of 3.6 
 and 4.4 percent, and above October's increases of 2.4 and 
 4.2 percent, respectively.  Targeted inflation (CPIX) is 
 expected to slow to 4 percent over the next three months 
 as relatively lower expected fuel costs and the strong 
 rand keep inflation under control.  Major reasons for the 
 4.6 percent increase in CPIX include:  (1) annual 
 increases in the price indices for transport (+1.1 
 percentage points); (2) housing (+0.8 of a percentage 
 point); (3) medical care and health expenses (+0.7 of a 
 percentage point); (4) food (+0.5 of a percentage point); 
 (5) education (+0.4 of a percentage point); (6) fuel and 
 power (+0.3 of a percentage point); and (7) household 
 operation (+0.3 of a percentage point).  Source:  Nedbank, 
 Economic Research; I-Net Bridge, December 22. 
 
 ¶3.  Comment.  While November inflation figures were 
 slightly higher than expected, the strong rand will 
 support a favorable short-term inflation outlook.  Recent 
 lower oil prices will also lead to further expectations of 
 interest rate reductions during the next Monetary Policy 
 Committee meeting in February.  End comment. 
 
 WESTERN CAPE LOOKS AT INCREASING TAXES 
 -------------------------------------- 
 
 ¶4.  Western Cape is considering increasing hospitality and 
 commercial property development taxes as a way of 
 generating development funds for the province.  The 
 additional income is expected to offset the pressures 
 escalating social spending is placing on the provincial 
 economic development budget.   The studies investigating 
 the feasibility of these new taxes should be completed by 
 next year for the national government's approval.  The 
 province has applied to the National Treasury for the 
 approval to charge a fuel levy of 10 rand cents/liter on 
 motorists, which will raise about R300 million ($53 
 million, using 5.7 rands per dollar) for road, rail and 
 other economic infrastructure maintenance.  If the 
 province gets approval, the taxes may be imposed by the 
 end of next year.  A 10 percent tax on commercial property 
 development would raise about R250 million ($44 million) 
 annually on this year's provincial development projects of 
 about R2.5 billion ($440 million) for social housing and 
 property development in low-income areas, while a 
 hospitality tax could raise about R100 million ($17 
 million) annually for use in training and marketing of 
 Western Cape's tourism industry.  Source:  Business Day, 
 December 20. 
 
 ICASA PROPOSES NEW PRICE CAP 
 ---------------------------- 
 
 ¶5.   The Independent Communications Authority of South 
 Africa (ICASA) is proposing that future price increases of 
 Telkom (the telecommunication parastatal) be limited to 
 four percentage points below the rate of the CPIX 
 (consumer inflation less mortgages), used as the inflation 
 target by the South African monetary authorities. 
 Currently, the regulations state that Telkom caps its 
 annual price increase to 1.5 percentage points below 
 targeted inflation.  According to Telkom, the company's 
 revenue would fall by R625 million ($110 million) if the 
 new price-capping regulations were approved.  (Telkom 
 stated that a percentage point price increase translated 
 into an increase in revenue of R250 million ($44 
 million)).  Telkom itself proposed a cap of two percentage 
 points below inflation.   In 2003, Telkom received R40.6 
 billion ($5.4 billion, using 7.56, the average 2003 rand 
 per dollar exchange rate) in revenues and an operating 
 profit of R9.2 billion ($1.2 billion).  Telkom has already 
 filed a new price list for January 1 that lifts the cost 
 of local calls by 5.5 percent and raises the cost of an 
 overall basket of services by 0.15 percent. However, those 
 price changes would have to be amended under the new 
 rules.  ICASA hopes Communications Department Minister 
 Matsepe-Casaburri will approve its new regime in January, 
 and it would ask Telkom to file new tariffs within 30 
 days.  Telkom said if it must alter its tariffs again, it 
 should have until August 1, which would be less 
 "confusing," and would let its new prices be calculated on 
 its financial figures for the year to next March.  Source: 
 Business Day, December 20. 
 
 STRONG RAND MAY SUBDUE INFLATION 
 -------------------------------- 
 
 ¶6.  The rand's renewed surge in the past two months has 
 improved the inflation outlook for 2005 despite strong 
 domestic spending, surging credit demand and rising unit 
 labor costs.   The rand has gained about 12 percent 
 against a basket of trade-weighted currencies since the 
 beginning of the year, and is expected to remain firm next 
 year on the back of dollar weakness.  According to Nedcor 
 bank economists, the rand strength will hold into 2005 
 because of expected high commodity prices, positive 
 investment sentiment due to potential sovereign risk 
 rating upgrades, lower interest rates and stronger local 
 growth.  According to a group of economists surveyed by I- 
 Net Bridge, CPIX is expected to edge up to 4.3 percent 
 year on year in November, while producer price inflation 
 should increase 2.3 percent year on year from 1.9 percent 
 in October.  According to Nedcor bank, the rand is 
 expected to gain a further 10 percent against the dollar 
 in 2005.  Source:  December 20, Business Day. 
 
 COURT RULES AGAINST PHARMACEUTICAL PRICING REGULATIONS 
 --------------------------------------------- --------- 
 
 ¶7.  The Supreme Court of Appeal ruled against the 
 Department of Health's pharmaceutical pricing regulations 
 by stating that the proposed dispensing fees were not 
 appropriate.  According to the court, the regulations did 
 not consider the viability of the dispensing industry and 
 the single exit price introduced a price control 
 mechanism, which the Medicines and Related Substances Act 
 had not intended.  The Department of Health raised 
 jurisdictional issues since the Cape High Court denied the 
 industry a chance of appeal.  The Supreme Court of Appeal 
 dismissed these issues of jurisdiction by ruling that the 
 Cape High Court's delay in granting leave to appeal was so 
 unreasonable as to breach the constitutional right to a 
 fair hearing.  The regulations provided for a pricing 
 system that defined a single exit price of manufacturers 
 and a dispensing fee, which, for pharmacists, amounted to 
 R16 without a medical prescription and R26 with a 
 prescription.  The court did not challenge government's 
 right to administer prices but stated that the lack of any 
 document describing how dispensing fees were calculated 
 meant that the government did not consider the long-term 
 viability of the retail drug sector. The Health Department 
 was ordered to pay the court costs.  Source:  Independent 
 Foreign Service, December 20; Business Day, December 21. 
 
 ¶8.  Comment.  The Health Department plans to file an 
 appeal against this court judgment in the Constitutional 
 Court (equivalent to the U.S. Supreme Court), stating that 
 international experts regarded the pricing regulations as 
 reasonable and beneficial to consumers.  According to the 
 department, the single exit price set by drug 
 manufacturers since June 2004 reduced the price of 
 medicines by 19 percent.  Drug retailers have long argued 
 that the dispensing fee set by the government was so low 
 that many retailers would be forced to close.  Until the 
 Constitutional Court rules, the existing price regulations 
 have been rescinded and pharmacists are again entitled to 
 charge varied dispensing fees, while manufacturers can 
 charge different prices to different buyers.  End comment. 
 
 SOUTH AFRICA'S LEADING BUSINESS INDICATOR STILL INCREASING 
 --------------------------------------------- ------------- 
 
 ¶9.  South Africa's leading business cycle indicator is 
 still showing growth, increasing to 115.5 in October, 
 after September's rise to 115.1.  The business cycle 
 indicator has been rising since May 2003, as the economy 
 is experiencing economic growth above inflation.  The 
 third quarter GDP growth of 5.6 percent is significantly 
 higher than October's 4.2 percent CPIX's (consumer prices 
 less mortgage costs) increase.  Economic data and business 
 confidence over the past few months point to a 
 continuation of strong economic growth.  The export sector 
 has shown growth, but strong domestic demand has supported 
 continued manufacturing growth.  The leading indicator 
 signals possible changes in the business cycle by six to 
 twelve months and uses information on value of orders, job 
 advertisements, productivity and average hours worked per 
 factor worker as its components.  Source:  Business Day, 
 December 21. 
 
 FRAZER