VZCZCXRO9561
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #4907/01 3530929
ZNR UUUUU ZZH
R 190929Z DEC 05
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0517
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 004907 
 
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 December 16 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: 
 
 -  November Consumer Inflation Comes in at Five-Month Low; 
 -  Producer Prices Higher than Expected; 
 -  Jobs Increase by 1.4%; 
 -  Third Quarter Domestic Demand Strong; 
 -  Survey Assesses SA Business Climate; and 
 -  Fuel Shortages; 
 End Summary. 
 
 November Consumer Inflation Comes in at Five-Month Low 
 --------------------------------------------- --------- 
 
 ¶2.  Consumer inflation slowed for the third consecutive 
 month, to its lowest level in five months, as falling 
 petrol prices put downward pressure on inflation. 
 According to Statistics SA (StatsSA), CPIX (consumer price 
 index excluding mortgage costs) slowed to 3.7% y/y, 
 compared with 4.4% in October.  Overall consumer prices 
 (CPI) increased 3.4%, compared to 4% in October.  Both 
 goods and services inflation slowed in November, and 
 second-round inflationary pressures from higher oil prices 
 were still not evident in the inflation numbers.  Services 
 inflation continued to moderate, falling to 5% y/y, from 
 5.2% in October.  In June, services inflation reached 
 6.1%.  November goods price inflation eased to 3.1%, from 
 4.1% the previous month.  The 0.1% month on month decline 
 in goods prices was driven mainly by falling transport 
 costs.  The transport component declined 2% month on month 
 last month, bringing y/y growth to 6%.  Vehicle running 
 costs, which capture movements in fuel prices, declined 
 3.3% during the month.  The food component of the CPIX 
 rose 0.8%, bringing y/y growth to 2%.  The consumer price 
 index is expected to end 2005 at about 4%, and average 
 4.5% in 2006.  Administrative prices, those controlled and 
 monitored by government, slowed to 7.5% y/y, from 10% in 
 October.  Source:  Business Day, December 15. 
 
 ¶3.  Comment.  For 27 consecutive months, consumer 
 inflation has remained within the South African Reserve 
 Bank's (SARB) targets of 3% and 6%.  In recent months 
 inflation expectations have reached close to 6% as 
 international crude oil prices rose to record highs, 
 prompting South African monetary authorities to keep 
 interest rates unchanged.  Inflation expectations are 
 likely to moderate in coming months, barring any oil-price 
 shocks.  The rand's performance will be one of the key 
 factors in the outlook for inflation, and interest rates, 
 with the relatively strong rand mitigating the effect of 
 higher oil prices on the domestic economy.  However, risks 
 to the inflation outlook remain, mainly in the form of 
 rising food prices, rising credit demand, and a rapidly 
 changing currency.  The SARB's Quarterly Bulletin showed 
 that the ratio of the current account to gross domestic 
 product increased to 4.7% in the third quarter 2005, up 
 from 3.7% in the previous quarter, although the deficit 
 was financed by incoming capital flows.  End comment. 
 
 Producer Prices Higher than Expected 
 ------------------------------------ 
 
 ¶4.  November's producer price inflation rose by 4.5% y/y, 
 higher than the market's expectation of a 4.1% increase 
 and October's producer price inflation of 4.2%.  The main 
 sources of producer price inflation by month came from 
 agricultural products rising 3.8% m/m, electrical 
 machinery increasing 2.8% m/m, mining and quarrying rising 
 1.8% m/m and manufactured food rising 1% on a monthly 
 basis.  November's prices show a moderating impact of 
 lower oil prices, with petroleum prices falling by 2.9% 
 m/m.  However, recent December oil price increases along 
 with food prices pose future inflationary risks.  On a 
 monthly basis, imported producer prices increased less 
 than domestic in November, with producer inflation being 
 restrained by a relatively strong rand; domestic firms' 
 inability to increase prices due to excess production 
 capacity; low global inflation and increased competition 
 from low cost global manufacturing firms.  Source: 
 Standard Bank PPI Alert and Investec PPI Update, December 
 ¶15. 
 
PRETORIA 00004907  002 OF 003 
 
 
 
 Jobs Increase by 1.4% 
 --------------------- 
 
 ¶5.  South Africa's formal, non-agricultural employment 
 grew by 99,000 jobs in the third quarter 2005, increasing 
 by 1.4%, according to the Quarterly Employment Statistics 
 released by Statistics SA.  Employment in 2005 has 
 increased steadily in the second and third quarter, after 
 dropping in the first quarter.  During the first quarter, 
 jobs dropped by 152,000, or 2.1%; while in the second 
 quarter, the number of people employed rose 1.9%.  During 
 the third quarter, no sector showed job losses.  For the 
 third quarter 2005, the number of jobs created in 
 transport, storage and communication rose 4.1% (13,000 
 jobs) to 333,000.  The construction industry reported a 
 quarterly increase of 11,000 employees, bringing the total 
 number of people it employs to 443,000.  The economy's 
 second-largest sector, manufacturing, added 13,000 
 employees, an increase of 1.1% from the second quarter. 
 Mining and quarrying was the only sector that did not add 
 any jobs in the third quarter.  Wholesale and retail 
 trade, repair of motor vehicles, and hotels and 
 restaurants reported a quarterly increase of 24,000 
 employees, or 1.7%.  A quarterly increase of 16,000 was 
 recorded in the financial intermediation, insurance, real 
 estate and business services industry (1.1%), while the 
 community, social and personal services industry reported 
 a quarterly increase of 21,000 employees (1.2%).  Source: 
 Business Day, December 14. 
 
 ¶6.  Comment.  The quarterly employment survey replaced the 
 Survey of Employment and Earnings in June 2005.  The 
 statistics are derived from a survey of about 24,500 
 businesses registered to pay income tax, excluding those 
 in agriculture, hunting, forestry and fishing.  The 
 biannual Labor Force Survey includes all sectors.  End 
 comment. 
 
 Third Quarter Domestic Demand Strong 
 ------------------------------------ 
 
 ¶7.  Gross domestic expenditure (GDE) increased 6.2% 
 (seasonally adjusted and annualized) compared with the 
 second quarter increase of 0%, according to the South 
 African Reserve Bank's (SARB) December Quarterly Bulletin. 
 Household debt rose to 63.5% of disposable income from 61% 
 in the second quarter.  SARB did not view the high level 
 of debt as problematic since the ratio of household debt 
 service payments to disposable income was 6.75%, only half 
 of its record high levels during 1998, when there were 
 considerable capital shortages.  The sharp growth in GDE 
 was due to a broad-based growth in gross fixed capital 
 formation, increasing 7.1% compared to the second quarter 
 growth of 4.4%.  Household consumption spending eased to 
 6.1%, compared to second quarter growth of 6.7%, primarily 
 due to slowing demand for durable goods.  Growth in South 
 Africa's unit labor costs accelerated to 4.5% in the 
 second quarter of 2005 compared to first quarter's rise of 
 3.8%.  Both quarterly increases are within the country's 
 3%-6% inflation target range.  Source:  Investec SARB 
 Quarterly Bulletin Update and Reuters, December 9. 
 
 Survey Assesses SA Business Climate 
 ----------------------------------- 
 
 ¶8.  A joint South African government and World Bank survey 
 assessed the South African investment climate, enumerating 
 both major challenges and positive trends towards 
 achieving 6% long-run economic growth.  Rigid labor laws, 
 little training provided by local firms, skills shortages, 
 and HIV/AIDS were cited as concerns by 800 local 
 businesses.  While 77% of Brazil's, 80% of Poland's, 69% 
 of China's and 55% of India's skilled labor force received 
 company training, only 45% of South Africa's skilled 
 workers received training.  The survey found that local 
 business did not find costs of regulation nor corporate 
 income taxes too high.  South African senior managers 
 spent 10% of their time dealing with regulations, compared 
 to 25% spent in China.  Direct losses due to crime and 
 security costs were higher in South Africa, although few 
 reported paying bribes and the legal system was rated 
 high.  Low energy costs and access to finance were also 
 among the positive trends.  HIV/AIDS was listed as a 
 
PRETORIA 00004907  003 OF 003 
 
 
 medium term concern; mainly related to uncertainty about 
 its effect on productivity, market size, profitability and 
 absenteeism.  The report suggested that the lack of 
 foreign investors might be due to the way in which black 
 empowerment transactions are financed, using equity 
 transfers and not creating new capital.  Source:  Business 
 Day, December 14. 
 
 Fuel Shortages 
 -------------- 
 
 ¶9.  Fuel shortages were reported in the Western Cape and 
 Gauteng provinces, starting December 10 and may extend to 
 January 2006, as a result of lead being phased out as of 
 January 1, 2006.  Colin McClelland, the Director of the 
 South African Petroleum Industry Association, cited 
 unexpected reductions in refining production as reasons 
 for shortages in fuel.  In the Western Cape, maintenance 
 shut-downs coinciding with adjustments to increase 
 production of unleaded gasoline caused shortages.  In 
 addition, airports in Cape Town and George were severely 
 affected when the jet fuel delivered failed safety tests. 
 Recent statements by the Department of Minerals and Energy 
 Minister Lindiwe Hendricks indicated that the government 
 gave oil companies enough notice of the change in 
 regulations and would consider possible increased 
 regulation in the interests of public concern.  Source: 
 Sunday Times, December 11; Pretoria News, December 12; 
 Business Day, December 15. 
 
 TEITELBAUM