VZCZCXRO4289
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #4520/01 3141425
ZNR UUUUU ZZH
R 101425Z NOV 05
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 9969
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 PRETORIA 004520 
 
SIPDIS 
 
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 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT:  SOUTH AFRICA ECONOMIC NEWSLETTER 
           November 10 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: 
 
 -  Reserve Bank Highlights Inflation Concerns; 
 -  October Net Reserves Reveal Small Increase; 
 -  British Foreign Investment in SA Increases; 
 -  Electricity Distribution Planned Reorganization Changes; 
 -  SA Highest in Antidumping Complaints; 
 -  Provinces Spend 40% of Capital Budget; 
 -  New Employment Study Shows Large Increase in Jobs; 
 -  Financial Sector Contributed to BEE Ownership; and 
 -  Telkom Begins to Charge Based on Internet Usage. 
 End Summary. 
 
 RESERVE BANK HIGHLIGHTS INFLATION CONCERNS 
 ------------------------------------------ 
 
 ¶2.  At its semi-annual Monetary Policy Forum, South 
 African Reserve Bank (SARB) Governor Tito Mboweni 
 emphasized the deterioration in inflationary expectations 
 over the past several months and reiterated SARB's 
 intentions to be ahead of the curve in dampening increased 
 inflation.  He cited higher oil prices as the primary 
 inflationary risk and viewed that second-round inflation 
 had not yet materialized.  However, if a further 
 deterioration in inflationary expectations happens, then 
 SARB would not hesitate to take appropriate action to 
 ensure inflation stayed within its 3%-6% range.  SARB now 
 expects CPIX inflation (consumer inflation excluding 
 interest costs on mortgages) to reach 5.8% in the second 
 quarter of 2006, easing to 5.3% by the end of 2007.  CPIX 
 has remained inside its target range for 25 consecutive 
 months.  Strong economic growth was expected to continue 
 for the remainder 2005, although high oil prices and 
 softer global growth posed substantial risks.  Strong 
 domestic spending has spurred GDP growth to 4.8% in the 
 second quarter 2005 from 3.5% in the first.  Growth is 
 expected to average above 4% for 2005, up from 2004's 
 growth of 3.7%.  Source:  Business Day and Business 
 Report, November 9. 
 
 ¶3.  Comment.  First-round effects of high oil prices refer 
 to the direct effect on inflation of higher fuel prices, 
 while second-round effects refer to additional costs being 
 passed on to consumers by producers and retailers that 
 push inflation even higher.  Since the last Monetary 
 Policy Committee (MPC) meeting in October, SARB Governor 
 Mboweni has repeatedly spoken about increased prospects of 
 higher interest rates if inflationary expectations 
 continue to rise.  If oil prices continue to rise, many 
 expect that the next movement in interest rates will be 
 up.  The next MPC meeting will start December 7.  End 
 comment. 
 
 OCTOBER NET RESERVES REVEAL SMALL INCREASE 
 ------------------------------------------ 
 
 ¶4.  South Africa's net reserves rose modestly in October 
 to $16.22 billion from $16.06 billion at the end of 
 September, according to the South African Reserve Bank 
 (SARB).  Gross reserves increased to $19.69 billion at the 
 end of October from $19.53 billion in September.  The 
 rand, which weakened about 5 percent in October, did not 
 change in reaction to the release of the foreign reserve 
 data.  In the future, net reserves could increase because 
 of Vodafone's intentions to increase its investment in 
 Vodacom to 50%, the second largest foreign direct 
 investment deal in South Africa.  Source:  Reuters, 
 November 7. 
 
 BRITISH FOREIGN INVESTMENT IN SA INCREASES 
 ------------------------------------------ 
 
 ¶5.  British-based cellular group Vodaphone wants to 
 increase its share of Vodacom, a South African cellular 
 company, to 50% from 35% at a cost of R16 billion ($2.5 
 billion, using 6.5 rands per dollar).  This is the second 
 largest foreign direct investment (FDI) in South Africa 
 after Barclays R28 billion ($4.3 billion) investment in 
 ABSA.  South Africa's balance of payments surplus has 
 continued to rise in the third quarter 2005, despite a 
 
PRETORIA 00004520  002 OF 003 
 
 
 continuing deficit on goods and services.  The expected 
 improvement in FDI should help South Africa finance its 
 current account deficit, which could reach 3.7% by the end 
 of 2005.  Analysts expect that the Vodaphone foreign 
 investment is the beginning of large increases of much 
 needed foreign investment in South Africa, as the country 
 begins to invest in its own infrastructure.  Rand Merchant 
 Bank Asset Management Chief Investment Officer, Charles 
 Booth, predicts that more foreign firms will target South 
 African assets, citing financial services, 
 telecommunications and construction sectors as possible 
 targets.  Source:  Business Day, November 4, 7, and 9. 
 
 ELECTRICITY DISTRIBUTION PLANNED REORGANIZATION CHANGES 
 --------------------------------------------- ---------- 
 
 ¶6.  The Department of Minerals and Energy (DME) announced 
 that it may increase the number of regional electricity 
 distributors (RED) from six to seven, to provide 
 additional incentives for smaller municipalities to join 
 the planned regional distribution system.  The proposed 
 seventh RED would consist of smaller municipalities that 
 refuse to join the other six.  The original six REDs 
 contained one large metropolitan area, and participation 
 in the REDs is voluntary, so some smaller municipalities 
 have refused to participate in the restructuring process. 
 Initially, government planned to merge Eskom's (the state- 
 owned electricity utility) seven distribution business 
 units and those of the 187 licensed municipal distributors 
 to form six REDs, aiming to simplify the current 2,000 
 tariff rates that exist between the licensed municipal 
 electricity distributors and Eskom.  Fierce opposition 
 from smaller municipalities resulted because these 
 municipalities have used the profits from electricity 
 provision to subsidize other services.  DME had proposed 
 that the profits and dividends earned by REDs would be 
 shared in proportion to the assets contributed by all 
 participants.  DME also wants participation in REDs to be 
 mandatory, noting that the Cabinet had approved the 
 Electricity Distribution Industry Restructuring Bill, 
 mandating municipal participation, that is now awaiting 
 Parliamentary approval.  Details regarding DME's plans on 
 how to compensate Eskom and municipalities for their 
 assets transferred to REDs would be presented to 
 Parliament in March 2006.  Source:  Business Day, November 
 ¶4. 
 
 SA HIGHEST IN ANTIDUMPING COMPLAINTS 
 ------------------------------------ 
 
 ¶7.  In the first six months of 2005, South Africa has 
 initiated the highest number of antidumping investigations 
 in the world, according to the World Trade Organization. 
 South Africa has begun 17 investigations, more than 3 
 times the number of cases started in 2004.  The products 
 that were more frequently cited were in the plastics 
 sector, followed by chemicals and base metals.  The 
 increasing trend in antidumping cases in South Africa was 
 not mirrored in the declining global trend.  Europe 
 initiated the second largest number of antidumping cases 
 (15), with China being the most frequent subject.  Source: 
 Business Day, November 4. 
 
 PROVINCES SPEND 40% OF CAPITAL BUDGET 
 ------------------------------------- 
 
 ¶8.  According to the Mid-Term Provincial Budget Report, 
 the nine provinces spent 40% of the R11.9 billion ($1.8 
 billion, using 6.5 rands per dollar) combined capital 
 budget by the midpoint of the fiscal year at the end of 
 September.  For fiscal year 2004, the provinces failed to 
 spend nearly R2 billion ($310 million) of their R12 
 billion capital budget.  Limpopo Province spent the least 
 amount of its capital budget, at 28.8% while Mpumalanga 
 and Gauteng provinces spent the highest amount, at 52.4% 
 and 48.9%, respectively.  Capital spending on education 
 was at the lowest percentage, 34.1% for the first six 
 months of 2005, with public works, roads and transport 
 showing the highest percentage of capital spending at 
 50.7% of the R4.3 billion budget.  Source:  Business Day, 
 November 3. 
 
 NEW EMPLOYMENT STUDY SHOWS LARGE INCREASE IN JOBS 
 --------------------------------------------- ---- 
 
PRETORIA 00004520  003 OF 003 
 
 
 
 ¶9.  The South African Employment Report showed that 1,000 
 new jobs per day were created in South Africa, enough to 
 absorb all new entrants into the labor market.  The study 
 used records of the Unemployment Insurance Fund (UIF) to 
 calculate new fund participants.  The data from UIF is not 
 used by Statistics SA to calculate official unemployment. 
 Mike Schussler, T-Sec chief economist in charge of the 
 report commissioned by trade union UASA, cited monthly UIF 
 new registered employees in commercial establishments at 
 30,000, enough to employ 360,000 new entrants to the labor 
 market every year.  UIF's commercial establishment 
 category does not include domestic workers, public sector 
 employees, the self-employed, or those only working for a 
 commission, implying that the actual job increases may be 
 more.  Source:  Business Day, November 3. 
 
 FINANCIAL SECTOR CONTRIBUTED TO BEE OWNERSHIP 
 --------------------------------------------- 
 
 ¶10.  Of all banking and insurance company equity sales to 
 black investors since 1996, over half were finalized since 
 the conclusion of the Financial Sector Charter (FSC) in 
 October 2003.  Black investors purchased R30 billion ($4.6 
 billion) over the past 18 months of the cumulative R50 
 billion ($7.7 billion) in stock sales since 1996, 
 according to BusinessMap Foundation Director Colin Reddy. 
 With the market capitalization of the financial sector on 
 the Johannesburg Securities Exchange at R694 billion ($107 
 billion), the R50 billion amounted to 7% of the sector's 
 equity transferred to black companies.  The FSC called for 
 10 percent direct black ownership.  In 2004, black 
 investors concluded 49 transactions worth R20 billion, and 
 by end of September 2005, 52 deals worth R12 billion were 
 concluded.  Nationally, Black Economic Empowerment (BEE) 
 transactions increased by 29% in 2004 and were worth R52.9 
 billion ($8.1 billion), according to auditing firm Ernst & 
 Young.  Philip Hourquebie, the Chief Executive of Ernst & 
 Young, said BEE had become a key driver of merger and 
 acquisition growth in South Africa.  According to 
 BusinessMap research, the banking sector employed various 
 strategies to improve black ownership.  ABSA used an 
 option structure, Standard Bank used a large employee 
 scheme, FirstRand opted to sell to community trusts and 
 Nedbank included its clients.  Source:  Business Day, 
 November 7. 
 
 TELKOM BEGINS TO CHARGE BASED ON INTERNET USAGE 
 --------------------------------------------- -- 
 
 ¶11.  On November 1, Telkom introduced a new billing system 
 based on per gigabyte usage and capping of local services. 
 Monthly charges for a 30-gig account will increase to 
 approximately R2,000 ($308) compared to current charges of 
 R200 to R600.  While this new billing system may benefit 
 infrequent users, many small and medium enterprises (SMEs) 
 and home users will find the new charges much more 
 expensive.  Many Internet Service Providers have started a 
 petition to try to fight the proposed new billing scheme. 
 The complaints range from the more frequent ADSL 
 (asymmetric digital subscriber line) reset times to 
 concerns about losses due to overusage when close to the 
 cap amount.  SMEs that are reliant on local Virtual 
 Private Networks (VPN) as well as the companies offering 
 these services will suffer the most.  Larger companies 
 will move their websites to international hosts where the 
 cost can be up to 20 times cheaper than in South Africa. 
 Source:  The Mercury, November 7. 
 
 HARTLEY