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UNCLAS SECTION 01 OF 03 PRETORIA 004003 
 
SIPDIS 
 
DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR OAISA/RALYEA/CUSHMAN 
USTR FOR COLEMAN 
PARIS FOR NEARY 
 
E.O. 12958:  N/A 
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT:  SOUTH AFRICA ECONOMIC NEWSLETTER 
          SEPTEMBER 30 2005 ISSUE 
 
¶1. Summary.  Each week, Embassy 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 Price Inflation Close to Market Expectations; 
 -  Producer Prices Show Oil Price Impacts; 
 -  Second Quarter 2005 Formal Employment Gains; 
 -  GDP May be Underestimated; 
 -  Second Quarter GDP Growth Rebounds; 
 -  South Africa Slips One Spot in Global Competitiveness 
 Report; and 
 -  Oil Prices and Rand Impact Inflation Target. 
End Summary. 
 
CONSUMER INFLATION CLOSE TO MARKET EXPECTATIONS 
--------------------------------------------- -- 
 
¶2.  August consumer price inflation increased close to the 
market consensus forecast and most analysts expect that 
interest rates will remain unchanged throughout the rest 
of 2005.  Higher fuel prices drove August targeted 
inflation rate (consumer prices excluding mortgage costs, 
CPIX) to 4.8% from July's 4.2%.  Consumer prices (CPI) 
increased 3.9% from July's 3.4%.  Market consensus 
expected CPIX and CPI to increase by 4.9% and 4%, 
respectively.  Oil prices remain a significant risk to the 
inflation outlook and inflation is expected to trend 
higher in coming months to end 2005 at about 5%.  The 
single largest contributor to August consumer inflation 
remained transport, which rose 1.9%.  Fuel prices, which 
rose 27 rand cents a liter in August, rose by another 29 
rand cents a liter in September.  Food prices declined to 
2.6% year on year last month, after a sharp rise to 2.8% 
in July.  August's consumer inflation figures did not 
provide conclusive evidence that high fuel costs were 
spreading to the rest of the economy, though at some point 
higher oil prices would drive up prices of other products 
such as food and other consumables.  Economists expected 
that the CPIX would increase above 5% in September because 
of oil prices.  Source:  Business Day, Business Report, 
September 29; Investec CPIX Update, September 28. 
 
¶3.  Comment.  On September 28, Finance Minister Trevor 
Manuel said that he did not have serious concerns about 
the effect of oil prices on economic growth or the balance 
of payments.  End Comment. 
 
PRODUCER PRICES SHOW OIL PRICE IMPACTS 
-------------------------------------- 
 
¶4.  August producer prices (PPI) increased by 4.2%, up 
from 3.6% in July, with petroleum and coal products 
showing the largest increase.  August's PPI inflation 
matched market consensus forecasts at 4.2%.  Domestic 
producer prices increased by 3.6% and imported producer 
prices increased 6.2% compared to July's increase of 3% 
and 5.2%, respectively.  With the exception of petroleum 
and coal prices, other industries showed relatively mild 
monthly price gains, another signal that higher oil prices 
have not yet significantly affected domestic industries 
that use energy.  Besides July and August 2005, the last 
time that monthly producer price inflation had been above 
3% was in April 2003.  Over the past 5 years, producer 
prices increased 0.6% in 2004, 1.7% in 2003, 14.2% in 
2002, 8.4% in 2001, and 9.2% in 2000.  Source:  Standard 
Bank, PPI Alert; I-Net, September 29. 
 
SECOND QUARTER 2005 FORMAL EMPLOYMENT GAINS 
------------------------------------------- 
 
¶5.  Statistics South Africa's (StatsSA) second release of 
the Quarterly Employment Survey (QES) showed the total 
number of employed people in the formal non-agricultural 
sector increased by 131,000 in the second quarter of 2005, 
increasing 1.9%.  During the previous quarter, the number 
of jobs created declined by 2.1%.  Just over 7 million 
people were employed by the formal non-agricultural sector 
during the second quarter.  Construction was the main 
employment generator creating 46,000 jobs, followed by the 
wholesale and retail trade sector, which created 29,000 
jobs.  In manufacturing, the number of jobs rose by 
14,000, or 1.2%.  Apart from the electricity, gas and 
water supply industries, which were unchanged, all the 
sectors surveyed showed growth.  GDP increased 4.8% in the 
second quarter, from 3.5% in the first, with manufacturing 
and construction industries posting strong growth. 
Source:  Business Day and Business Report, September 28. 
¶6.  Comment.  As of June 2005, the QES replaced the Survey 
of Employment and Earnings, which did not include 
employment in small companies.  QES statistics are not 
strictly comparable with those in Stats SA's biannual 
Labor Force Survey which provides the official jobless 
rate, and give a good indication of the economy's job- 
creating performance.  The QES is derived from a survey of 
almost 24,500 businesses registered to pay income tax, 
excluding those in the agriculture, hunting, forestry and 
fishing sectors, while the Labor Force Survey involves 
interviews with 30,000 households.  End comment. 
 
GDP MAY BE UNDERESTIMATED 
------------------------- 
 
¶7.  Efficient tax collection by the South African Revenue 
Service (SARS) was not enough to explain the strong 
increase in Value Added Tax (VAT) receipts over the last 
three years, resulting in the possibility that GDP could 
be underestimated, according to Iraj Abedian, CEO of the 
Pan-African Investment and Research Services.  VAT 
receipts have grown faster than GDP, suggesting that 
consumption patterns have changed.  South African Reserve 
Bank figures showed high revenue collection in the first 
quarter, with the government set to overrun its R369.9 
billion ($60 billion, using 6.3 rands per dollar) revenue 
target.  SARS collected about R90.2 billion ($14 billion) 
in the first quarter of the 2005/06 fiscal year, a yearly 
increase of 19.6%.  Abedian asserted the strong growth in 
VAT revenue was partly explained by efficient tax 
collection and an underestimation of the size of the 
economy, but also by a shift in consumer spending 
patterns.  VAT receipts increased due to a switch from 
zero-rated basic food products, such as fruit, vegetables, 
brown bread and milk, to products such as fruit salad, 
processed vegetables and white bread, which were taxed at 
14%.  A 10% shift in spending towards taxable food 
substitutes resulted in VAT revenue rising nearly 5%.  To 
explain the current growth in VAT revenue, Abedian said 
that expenditure should have shifted towards taxable 
products by as much as 30%, leading to suspicions 
concerning accurate coverage in national income and 
product accounts.  Source:  Business Report, September 26. 
 
SECOND QUARTER GDP GROWTH REBOUNDS 
---------------------------------- 
 
¶8.  The latest Quarterly Bulletin (September 2005) from 
the South African Reserve Bank presented a strong domestic 
economy supported second quarter 2005 GDP growth of 4.8%, 
up from first quarter growth of 3.5%.  Real domestic 
demand (excluding the foreign sector), in its 18th quarter 
of positive growth, grew 4.9% in the second quarter 2005 
compared to 1.7% during the previous quarter.  Household 
consumer spending increased 5.9% from 5.5% in the first 
quarter.  Demand for durable goods led consumer spending. 
Real spending on durable goods increased from 12% in the 
first quarter to 26.5% in the second, reflecting high 
consumer confidence levels, low interest rates and 
attractive sales incentives.  Household disposable income 
rose by 5.7% during the second quarter.  Increased credit 
financed consumer spending, with the household debt to 
disposable income ratio reaching 61.8% in the second 
quarter in comparison to 51.4% six quarters earlier. 
Investment spending slowed in the second quarter, 
increasing 5.7% from 10.1% in the previous quarter.  In 
the first quarter, public corporation investment was 
boosted by South African Airlines' purchases of aircraft. 
Gross saving as a percentage of GDP increased to 13.5% in 
the second quarter from 13% in the first.  South Africa's 
savings rate is low compared with other emerging markets, 
such as China, which has a savings rate of 50% of GDP. 
The current account improved due to an increase in 
exports.  The current account deficit reached R51 billion 
in the second quarter, or 3.4% of GDP from first quarter's 
3.8% of GDP.  Source:  Business Day and Business Report, 
September 23. 
 
SOUTH AFRICA SLIPS ONE PLACE IN GLOBAL COMPETITIVENESS REPORT 
--------------------------------------------- ---------------- 
 
¶9.  In the World Economic Forum's (WEF) 2005 Global 
Competitiveness Report, South Africa slipped one place to 
42 out of 117 countries compared with last year's ranking 
of 41.  The WEF report praised South Africa's strong 
macroeconomic policies; however, pointed to rising crime, 
corruption and inability to adopt new information 
technologies as reasons for the 2005 slippage in rankings. 
Indicators showing access in South Africa to computers and 
the internet and university enrollment rates declined, 
while 20% of the forum's survey thought that an 
inadequately trained workforce posed the greatest hurdle 
to doing business in South Africa.  China and India ranked 
lower than South Africa, at 49 and 50, respectively, due 
to institutional weaknesses (a category that includes 
judicial independence, property rights and government 
favoritism).  WEF rankings are drawn from publicly 
available data as well as the results from a survey of 
11,000 business leaders in 117 countries.  Source: 
Business Day, September 29. 
 
OIL PRICES AND RAND IMPACT INFLATION TARGET 
------------------------------------------- 
 
¶10.  Henry Flint, head of global markets research at 
Standard Bank, highlighted the relationship between oil 
prices, rand/dollar exchange rates and inflation targeted 
by the South African Reserve Bank.  Flint's model suggests 
that CPIX could rise to over 7%, if oil prices remained at 
$70 per barrel and the rand/dollar exchange rate averaged 
6.4 over a year.  If oil prices remained at $50 per barrel 
and the exchange rate averaged no higher than 6.6 rands 
per dollar for a year, then the CPIX 3% to 6% targeted 
range would still be met.  In the year to date, the rand 
has averaged R6.31 rands per dollar and the oil price 
averaged $54.30 a barrel; however, in the past two months 
oil prices have averaged $63.80.  At $60 per barrel and 
the rand/dollar exchange rate averaging 6.4, inflation 
should be above the 6% upper range.  Flint expects a 
weakening dollar, high commodity prices, and South Africa 
to attract more emerging market investments as support of 
continual rand strength.  Source:  Business Report, 
September 29. 
 
TEITELBAUM