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RR RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #0330/01 0271337
ZNR UUUUU ZZH
R 271337Z JAN 06 ZDS (CTNG RUEHSD SRVC 0075)
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 1172
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 000330 
 
SIPDIS 
 
C O R R E C T E D COPY (ADDED SBU CAPTION/PORTION MARKINGS) 
 
SENSITIVE 
 
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 JANUARY 27 2006 
ISSUE 
 
 
 ¶1.  (U) 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: 
 
 -  December Consumer Prices Higher; 
 -  Producer Prices Up by 5.1%; 
 -  Consumer Survey Confirms Widening Income Gap; 
 -  South Africa's Official Unemployment at 26.7%; and 
 -  Treasury Proposes Reform of Local Taxes; 
 End Summary. 
 
 December Consumer Prices Higher 
 ------------------------------- 
 
 ¶2.  (U) Consumer prices (CPI) increased 3.6% in December, 
 compared to November's growth of 3.4%.  December's 
 consumer prices excluding mortgage costs (CPIX) rose to 
 4%, from November's 3.7% increase.  December's inflation 
 came in slightly higher than market expectations of CPI 
 and CPIX at 3.4% and 3.8%, respectively.  For 2005 as a 
 whole, the rates of inflation for CPI and CPIX reached 
 3.3% and 3.9%, respectively.  Food inflation, at 4.3% 
 compared to November's 2.4% increase, explained much of 
 the increase in December's inflation, with prices of meat, 
 vegetables, grains, fruits and fish showing healthy gains. 
 Inflation in the state owned enterprises 
 (telecommunications, electricity, and utilities) increased 
 7.8%, above the 4%-6% targeted range.  Inflation for the 
 poorest people rose 3.8% compared to 3.3% for the poor and 
 middle income people and 3.6% for the richer people.  By 
 province, inflation was the highest in Northwest (4.9%) 
 and Mpumalanga (4.6%) while least in Limpopo (2.6%) and 
 KwaZulu-Natal (3.1%).  Source:  Statistics SA Release 
 P0141.1; Standard Bank, CPI Alert and Investec CPIX 
 Update, January 25. 
 
 ¶3.  (U) Comment.  With oil prices above $60 per barrel (even 
 with the rand's strength mitigating some of the oil price 
 increase's impact) and high expected December consumer 
 spending, most analysts expect the South African Reserve 
 Bank to leave interest rates unchanged at its next meeting 
 on February 2.  Though not final, February's gasoline 
 prices are expected to increase approximately R0.13 per 
 liter compared to a decline of R0.30 in December. 
 Table 1 gives annual consumer price inflation for the 
 previous 3 years. 
 Inflation     2003     2004     2005 
 CPI           5.8%     1.4%     3.3% 
 CPIX          6.8%     4.3%     3.9% 
 Core CPI      6.7%     4.6%     4.0% 
 Note:  Above Table lists consumer prices of metropolitan 
 and other urban areas.  End comment. 
 
 Producer Prices Up by 5.1% 
 -------------------------- 
 
 ¶4.  (U) December's producer price inflation accelerated to 
 5.1% from 4.5% in November primarily due to rising 
 agricultural prices, although it came in below market 
 expectations of 5.2%.  On an annual basis, prices of 
 domestically produced goods increased 4.6%, while imported 
 goods increased 6.5%.  On a month-to-month basis, prices 
 of imported goods declined by 0.4% due to the strong rand. 
 Producer price inflation has been rising steadily 
 throughout 2005, starting at 1.4% in January.  The main 
 contributors to December's uptick in inflation were 
 agricultural products, with December's y/y inflation at 
 9.9%, up from 5.5% in November, and mining and quarrying 
 products at 26.1% in December compared to 23.8% in 
 November.  Source:  PPI Alert and Statistics SA P0142.1, 
 January 26. 
 
 ¶5.  (U) Comment.  Since movements in producer prices 
 foreshadow consumer prices, continued increases may lead 
 to rising consumer prices.  Rand strength, however, may 
 mitigate a one-to-one relationship between increasing 
 producer and consumer prices.  Table 2 gives annual 
 producer price inflation for the previous three years. 
 Producer Inflation    2003    2004    2005 
 PPI                   1.7%    0.6%    3.1% 
 Domestic PPI          3.9%    2.3%    2.9% 
 Imported PPI         -4.2%   -3.9%    3.6% 
 
PRETORIA 00000330  002 OF 003 
 
 
 End comment. 
 
 Consumer Survey Confirms Widening Income Gap 
 -------------------------------------------- 
 
 ¶6.  (U) The University of South Africa's Bureau of Market 
 Research released its latest Living Standards survey which 
 showed a widening gap between the rich and poor.  Only 
 800,000 South African households in the top Living 
 Standards Measure (LSM 10) accounted for 30.5% of total 
 household spending of R873 billion ($145.5 billion using 6 
 rand per dollar) in 2005.  About 8% of 12.4 million 
 households (967,000 households) spend less than R7,000 
 ($1,200) per year, accounting for 0.7% of total household 
 expenditure.  The middle class (LSM 6), accounting for 1.8 
 million households, spent R125.6 billion ($21 billion), or 
 14% of total expenditure.  Poor households spent 71% of 
 their budget on food compared to 24% and 28% by their 
 middle class and rich households respectively.  Income tax 
 was the highest expenditure item at 17% for the rich 
 households, followed by housing and electricity at 14%. 
 South Africans spent R11 billion ($1.8 billion) on 
 holidays in 2005, with the LSM 10 households responsible 
 for 61% of that amount.  The living standards survey 
 excluded social grants and donations.  Source:  Reuters, 
 Business Day, I-Net Bridge, January 24. 
 
 South Africa's Official Unemployment at 26.7% 
 --------------------------------------------- 
 
 ¶7.  (U) South Africa's official unemployment rate in September 
 2005 remained stable at 26.7%, compared to 26.5% in March 
 2005 and 26.2% in September 2004 according to Statistics 
 SA's Labor Force Survey (LFS).  From January to September 
 2005, the number of created jobs increased by 658,000 
 jobs, with more than half generated between March and 
 September.  New entrants to the labor market accounted for 
 the unchanged rate of official unemployment.  The expanded 
 unemployment rate (including people who have not looked 
 for work over a four-week period) fell from 40.5% in March 
 2005 to 38.8% in September.  Discouraged work seekers 
 decreased by 512,000.  It was the first time this decade 
 that the number of discouraged work seekers declined, an 
 indication of the extent to which a growing economy 
 encourages people to enter the labor market.  South 
 African growth is expected at 5% in 2005, the highest in 
 21 years.  Compared to September 2004, employment declined 
 in the agriculture and manufacturing sectors; however, 
 retail trade, finance, and construction showed the largest 
 gains.  Broken down by province, KwaZulu-Natal had the 
 highest unemployment rate of 32.8%, followed by Free State 
 (30.2%), Limpopo (30.1%), Eastern Cape (29.9%), North West 
 (27.4%), Mpumalanga (26.9%), Northern Cape (24.7%), 
 Gauteng (22.8%) and Western Cape (18.9%).  By population 
 group, the unemployment rate rose among all but white 
 members of the labor market, where unemployment declined 
 to 5.1% from 5.4% in September 2004.  Source:  Reuters, 
 January 24; Business Day and Business Report, January 25. 
 
 ¶8.  (U) Comment.  The LFS is a twice-yearly household survey, 
 providing information about the level and pattern of 
 unemployment, and the industrial and occupational 
 structure of the economy.  The LFS collects information 
 from approximately 69,000 adults of working age (15 to 65 
 years) living in over 30,000 households nationwide.  Stats 
 SA staff interviewed these households, completing an LFS 
 questionnaire, consisting of 120 questions.  Besides 
 detailed questions about work activities, information 
 about the following areas is included:  (1) demographic 
 information (name, age, sex, population group); (2) 
 biographical information (marital status, language, 
 migration, education, training and literacy); (3) 
 unemployment and non-economic activities; (4) job creation 
 and expanded public works program activities; (5) 
 agricultural activities and uncompensated activities; (6) 
 migrant workers; and (7) household members running 
 businesses.  The LFS collects more household information 
 than other information sources such as registrations 
 recorded by the Unemployment Insurance Fund (UIF) or the 
 Quarterly Employment Statistics (an employment survey of 
 non-agricultural firms).  Economists, such as T-Sec's 
 economist Mike Schussler, have argued that Stats SA 
 significantly underestimates employment by not using the 
 UIF data.  End comment. 
 
PRETORIA 00000330  003 OF 003 
 
 
 
 Treasury Proposes Reform of Local Taxes 
 --------------------------------------- 
 
 ¶9.  (U) National Treasury proposed abolishing the regional 
 services council (RSC) taxes and replacing them with an 
 alternative system of taxes.  According to National 
 Treasury, the administration of the tax is difficult 
 because municipalities do not have access to the books of 
 tax payers, making effective enforcement hard.  The RSC 
 taxes are paid by businesses and employers to the 
 metropolitan council in the region in which they operate. 
 The RSC tax collected about R5.5 billion ($920 million) in 
 the 2003-2004 financial year, or 9% of local government 
 revenue.  Removal of the RSC tax will mean a R24 billion 
 ($4 billion) loss to tax collections over the next three 
 years.  In last year's budget speech, Finance Minister 
 Trevor Manuel said the tax would end by June 30, 2006, 
 whether or not alternatives are in place.  Alternatives 
 proposed by Treasury include a mix of grants, revenue 
 sharing, and additional taxes.  However, according to 
 South African Chamber of Commerce (SACOB), the alternative 
 taxes suggested by Treasury were not an improvement. 
 Finance Minister Manuel is expected to make an 
 announcement in February's national budget speech 
 concerning which taxes will replace the RSC.  National 
 revenues of R7 billion ($1.2 billion) has been allocated 
 this financial year to compensate local municipalities for 
 any lost revenue.  Source:  Business Day, January 26. 
 
BOST