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UNCLAS SECTION 01 OF 03 PRETORIA 000394 
 
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 
           January 28 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: 
 -  December Consumer and Producer Inflation Less than 
 Expected; 
 -  Study Questions Informal Sector's Importance in 
 Increasing Employment; 
 -  South Africa Favored for U.S. Investment; 
 -  Calls for Increased Textile Protection as MFA Ends; 
 -  Aspen Approved by U.S. FDA; and 
 -  UCT Business School Ranked in Top 100. 
 End Summary. 
 
 DECEMBER CONSUMER AND PRODUCER INFLATION LESS THAN 
 EXPECTED 
 --------------------------------------------- ------ 
 
 ¶2.  December's consumer prices, CPI, and consumer prices 
 excluding mortgage costs, CPIX, increased by 3.4 and 4.3 
 percent (y/y), less than the consensus forecasts of 3.6 
 and 4.6 percent, respectively.  Last month's consumer 
 price inflation reached 3.7 percent for overall consumer 
 prices and 4.6 percent for the targeted inflation rate. 
 The lower annual rate in December 2004 compared to the 
 previous month can be explained by lower inflation in 
 medical care and health expenses, transport and food, even 
 though housing prices increased.  In December, the CPI for 
 medical care and health expenses increased 8.4 percent 
 compared to November's increase of 9.1 percent.  The CPI 
 for transport increased 6.8 percent in December compared 
 to the previous month's inflation of 8.4 percent. 
 However, recent oil prices have risen substantially, 
 signaling that easing of transport costs may not continue 
 in subsequent months.  Food prices increased 1.5 percent 
 in December, compared to November's increase of 1.9 
 percent.  As the strong housing demand continues, the CPI 
 for housing showed a higher December increase of 1.4 
 percent compared to November's increase of 1.1 percent. 
 Table 1 shows annual inflation of CPI, CPIX and PPI 
 (producer price inflation) over the past three years. 
 December's producer prices increased 1.9 percent, lower 
 than the consensus forecast of 2.6 percent.  Lower oil 
 prices contributed to the lower producer price inflation 
 as well as lower agricultural commodity prices.  A 
 stronger rand in December (averaging 5.69 rands per 
 dollar) eased inflation of imported goods.  For 2004, 
 domestic producer prices increased 2.3 percent, imported 
 producer prices declined by 3.9 percent leading to an 
 overall 2004 producer price increase of 0.6 percent. 
 Source:  Statistics SA Releases P0141.1, January 26; 
 P0142.1, January 27; Standard Bank CPI, January 26; PPI 
 Alert, January 27. 
 
 Table 1 
                2002      2003      2004 
 CPI            9.2%      5.8%      1.4% 
 CPIX      9.3%      6.8%      4.3% 
 PPI            14.2%     1.7%      0.6% 
 
 ¶3.  Comment.  December's lower than expected CPIX 
 inflation increased the chance of an interest rate 
 reduction, but many analysts think that South African 
 Reserve Bank may reduce rates in April rather than the 
 February Monetary Policy Committee meeting.  Out of six 
 economists surveyed, two expected interest rate reductions 
 by February; the rest expected cuts by April. End Comment. 
 
 STUDY QUESTIONS INFORMAL SECTOR'S IMPORTANCE IN INCREASING 
 EMPLOYMENT 
 --------------------------------------------- ------------ 
 
 ¶4.  The University of South Africa's Bureau of Market 
 Research completed a study based on surveys of informal 
 sector traders in Pretoria's greater metropolitan area. 
 Informal sector traders are defined as businesses or 
 traders that are not registered for VAT purposes and do 
 not offer any wages or benefits.  The study concludes that 
 South Africa's informal traders run mainly survivalist- 
 type enterprises as an escape from poverty and 
 unemployment, and do not have the entrepreneurial acumen 
 to increase their businesses.  The study shows that 50 
 percent of those surveyed operated their informal 
 businesses for longer than five years, while 15 percent 
 had run their businesses for between three and five years. 
 Almost 90 percent of respondents said they would continue 
 trading as informal businesses, while a majority said they 
 would not accept a salaried job.  About 70 percent of 
 informal businesses were in the retail trade sector.  The 
 study found that informal businesses had start-up capital 
 of less than R1,000 ($167, using 6 rands per dollar). 
 Average monthly revenue was estimated at R3,420 ($570), 
 while gross profit averaged about R1,000.   According to 
 the study, R1,000 was less than half the monthly sum 
 needed to sustain a household at a minimum living level. 
 The conclusions of the study imply that government 
 assistance should be targeted in order to boost 
 entrepreneurs' ability to expand, while improving in areas 
 such as infrastructure development (e.g., providing 
 shelter and basic services).  Small business development 
 is an important avenue for job creation, but government 
 should have a more targeted approach to financial and 
 training assistance.  Source:  Business Day, January 25. 
 
 SOUTH AFRICA FAVORED FOR U.S. INVESTMENT 
 ---------------------------------------- 
 
 ¶5.  In 2003, South Africa remained the top recipient of 
 U.S. foreign direct investment of all countries in sub- 
 Saharan Africa not exporting petroleum, according to 
 figures released by the U.S. International Trade 
 Commission.  Oil exporting countries Equatorial Guinea and 
 Nigeria attracted the largest sums of U.S. foreign direct 
 investment flows in that year, with $823 million and $340 
 million respectively.  At $89 million, South Africa 
 received substantially less U.S. investment than its oil- 
 producing counterparts.  Cameroon, a country that does not 
 export petroleum, was not far behind South Africa, 
 receiving U.S. foreign direct investment worth $73 million 
 in 2003.  South Africa received virtually all of the 
 foreign portfolio investment flows directed to sub-Saharan 
 Africa.  Total exports from sub-Saharan Africa to the 
 United States increased almost 40 percent to about $25.5 
 billion in 2003, compared with $18.2 billion in the 
 previous year, attributed to an increase in oil exports. 
 Sub-Saharan Africa's non-energy related exports to the 
 United States increased 20 percent, reaching $7.8 billion. 
 Exports from sub-Saharan African countries that are 
 eligible for AGOA benefits increased 36.3 percent to $14 
 billion in 2003.  Source:  Business Day, January 25. 
 
 ¶6.  Comment.  According to the South African Reserve Bank, 
 both the United States and Europe have been important 
 sources of South African foreign investment over the past 
 three years, although the U.S. share is far larger in 
 portfolio investment compared to direct investment.  The 
 United States comprises virtually all of America's share 
 of investment, at 23.7 percent of total foreign investment 
 in 2003, while the United Kingdom is the main European 
 investor, reaching 38.3 percent of foreign investment, 
 although its share is greater in direct rather than 
 portfolio investment.  End comment. 
 
 CALLS FOR INCREASED TEXTILE PROTECTION AS MFA ENDS 
 --------------------------------------------- ----- 
 
 ¶7.  Both industry and unions have called for increasing 
 protection in textiles as the January 1st expiration of 
 the Multi-Fiber Agreement (MFA) and the strength of the 
 rand have led to increasing numbers of job losses and 
 company closures.  The initial aim of the MFA was to 
 protect the textile industries of developed nations that 
 were facing competition from low-cost producers in poorer 
 states and so developed nations were allowed to impose 
 quotas on textile imports.  A World Trade Organization 
 study released in September last year showed that China 
 and India would probably dominate about 50 percent of the 
 global textile market in a post-MFA era.  AGOA still 
 offers the advantage of duty-free access to U.S. markets, 
 while other producers are subject to tariffs.  By 2003, 
 Lesotho had become a major textile manufacturer in Africa, 
 producing 31 percent of textiles exported to the US under 
 AGOA, with roughly 50,000 people employed by Lesotho's 
 textile industry in 2004, compared with 20,000 two years 
 earlier. By the end of 2004, six textile factories shut 
 down, leaving 6,650 employees without work.  The six 
 company owners who closed their businesses believed that 
 the low wages, economies of scale and efficient 
 engineering of factories in China and India would 
 eventually crowd them out of the market.  In South Africa, 
 30,000 textile workers have lost their jobs in the past 
 two years due to the influx of Chinese goods.  Walter 
 Simeoni, the president of the SA Textile Federation, 
 recommends that South Africa impose a quota on Chinese 
 textile imports allowing the textile industry more time to 
 reorganize.  According to Simeoni, Chinese clothing now 
 represents 86 percent of the total garments imported into 
 South Africa.  Most of the increase in Chinese imports 
 occurred within the past three years.  Currency 
 fluctuations have worsened the crisis in the textile 
 industry. The rand has strengthened from the historic low 
 it reached in December 2001, when $1 traded for R13.85. 
 The dollar is now worth about R6.  Industry sources 
 estimate that an exchange rate of R9 to the dollar is 
 needed for local textile exports to regain their edge. 
 Manufacturers also complain that labor costs in the 
 country are pricing them out of the market.  Simeoni 
 claimed that monthly salaries for the industry had 
 increased from about $215 (R1,290) a month in January 2002 
 (excluding overtime and shift allowances) to $500 in 
 September 2004, although these labor cost estimates are 
 somewhat controversial, with many industry analysts still 
 quoting labor costs between $200-$300 per month.   South 
 Africa's competitors in the Far East paid between $40 and 
 $100 a month.  Source:  Business Report, January 26. 
 
 ASPEN APPROVED BY U.S. FDA 
 -------------------------- 
 
 ¶8.  Aspen Pharmacare won U.S. Federal Drug Administration 
 (FDA) regulatory approval for its AIDS drugs to be 
 included in the U.S.'s $15 billion AIDS program.  The 
 approval is for the most widely used triple cocktail 
 combination of Lamivudine/Zidovudine and Nevirapine 
 tablets in conventional adult dosages and Aspen stated 
 that the drugs would be priced at affordable levels. 
 Aspen is the first accredited generic supplier to the U.S. 
 AIDS program.  Drug production will begin at a Port 
 Elizabeth factory soon, which was approved by the FDA in 
 December.  Aspen's pioneering of anti-retroviral drugs 
 (ARV) on the African continent and its world first generic 
 ARV recognition by the FDA was achieved after getting 
 voluntary licenses from the original drug manufacturers. 
 The license providers include GlaxoSmithKline, the leading 
 supplier of HIV and AIDS drugs, German drug maker 
 Boehringer Ingelheim, and Bristol-Myers Squibb.  By close 
 of business on January 25, shares in Aspen increased 4.4 
 percent to R19.84 per share.  About 25.4 million people 
 live with HIV in Africa, where just three percent of those 
 infected had access to life-prolonging ARV drugs. At least 
 2.3 million people died from the disease in sub-Saharan 
 Africa in 2004.  Source:  Business Day; Business Report; 
 allAfrica.com, January 26. 
 
 UCT BUSINESS SCHOOL RANKED IN TOP 100 
 ------------------------------------- 
 
 ¶9.   In a first for Africa, the University of Cape Town's 
 Graduate School of Business MBA program has been ranked in 
 the Financial Times' Top 100 list of programs.  The annual 
 survey ranked UCT's School of Business as 82nd on the 
 list.  The results were based on full-time MBA courses and 
 institutions were judged according to a basic three-tiered 
 evaluation strategy.  The first set of criteria 
 investigated students' progress after they had graduated 
 and were in the workplace; the second concentrated on the 
 school itself, regarding diversity of students, the 
 faculty and board members; and the third examined the 
 institution's performance and contribution in the research 
 field.  Harvard shared overall top position alongside 
 Wharton School at the University of Pennsylvania.  Source: 
 Allafrica.com; Cape Argus, January 26. 
 
 
 MILOVANOVIC