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RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #0787/01 0551105
ZNR UUUUU ZZH
R 241105Z FEB 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 1808
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 000787 
 
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 FEBRUARY 24 2006 
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: 
 
 -  January Consumer Prices Continue Their Muted Rise; 
 -  Producer Prices Increase 5.5%; 
 -  Power Outages in Western Cape Province; 
 -  Crisis Team to Manage Cape Power Outages; 
 -  South Africa and United Arab Emirates Exchange Skills; 
 -  Proposed Moratorium of Land Sales to Foreigners No 
 Problem to Investors; and 
 -  Provincial Capital Spending Expected to Improve. 
 End Summary. 
 
 January Consumer Prices Continue Their Muted Rise 
 --------------------------------------------- ---- 
 
 ¶2.  Consumer prices (CPI) and consumer prices excluding 
 mortgage costs (CPIX) increased 4% and 4.3% in January, in 
 line with market consensus forecasts of 4% and 4.4%, 
 respectively.  January's inflation came in higher than 
 December's CPI and CPIX inflation of 3.6% and 4%, 
 respectively, primarily due to increasing food and medical 
 services prices.  Core inflation, which excludes items 
 with volatile prices, such fuel and certain types of fresh 
 and frozen food, rose to 4.1% from 3.7% in December.  With 
 CPIX inflation still below the midpoint of the South 
 African Reserve Bank's 3-6% target range, most analysts 
 expect no change in interest rates during 2006.  In his 
 annual budget speech, Finance Minister Trevor Manuel 
 expected CPIX inflation to average 4.5% over the next 
 three years.  It has remained inside its target range for 
 29 consecutive months.  January typically shows higher 
 inflation because some components included in the consumer 
 price indices are surveyed annually rather than every 
 month.  Specifically, annual surveys updated inflation for 
 housing (including rent) and medical care and health 
 expenses (including doctors' and hospital fees and 
 contributions to medical insurance).  On a monthly basis, 
 price inflation of health care and food contributed 0.3 
 and 0.4 percentage points, respectively, to January's 0.7% 
 change.  January's gasoline increase of 4 rand cents per 
 liter did not influence CPIX inflation much, although 
 February's 14 rand cent increase will put some pressure on 
 February's inflation.  In addition, continued rand 
 strength will dampen imported price inflation, helping to 
 contain inflation.  Source:  Reuters, Standard Bank, CPI 
 Alert and Investec CPIX Update, February 22; Business Day, 
 February 23. 
 
 ¶3.  Comment.  Over the last few years, prices of non- 
 tradable goods were the major sources of South African 
 inflation.  Between 2003 and 2005, education, tobacco, 
 health expenses, household operations and transport costs 
 posted the highest inflation.  Prices of clothing and 
 footwear, furniture and equipment along with recreation 
 and entertainment declined over the same period.  Imports 
 are highest in these industries as competition from low- 
 cost countries and the strong rand contained imported 
 inflation.  End comment. 
 
 Producer Prices Increase 5.5% 
 ----------------------------- 
 
 ¶4.  January producer prices increased by 5.5% (y/y) from 
 December's inflation of 5.1% lower than market 
 expectations of 5.9%.  Higher inflation in petroleum 
 products and coal, basic metals, and agriculture and 
 processed food contributed to January's higher annual rate 
 of inflation.  On a monthly basis, food prices declined, 
 due to lower fruit and vegetable prices.  As a result of a 
 stronger trade-weighted rand, inflation in imported 
 producer goods in January subsided slightly while domestic 
 producer prices increased.  In January, domestic and 
 imported producer prices increased 5.2% and 6.4% compared 
 to December's 4.6% and 6.5%, respectively.  Source: 
 Standard Bank, PPI Alert; Investec, PPI Update, Statistics 
 SA Release P0142.1; February 23. 
 
 Power Outages in Western Cape Province 
 -------------------------------------- 
 
 
PRETORIA 00000787  002 OF 003 
 
 
 ¶5.  Large portions of the Western Cape experienced power 
 outages during February 19 and 20, with continuing 
 intermittent power cuts expected throughout the week in 
 order to avert wide-scale blackouts.  During the weekend, 
 power outages affected mostly residential users, although 
 commercial and industrial consumers faced outages on 
 February 22.  Eskom has advised that Cape Town will have 
 to do without 500 megawatts (mW) of its normal weekday 
 consumption of 2600mW, according to Saleem Mowzer, chief 
 executive of the Regional Electricity Distributor.  Mowzer 
 said power cuts would continue until the weekend of 
 February 25-26, with the situation normalizing once the 
 Koeberg nuclear power station was working optimally.  The 
 Western Cape region is dependent on Koeberg and overland 
 power transmission lines for electricity supply.  Analysts 
 attribute erratic electricity supply to years of 
 underinvestment on ageing infrastructure that cannot 
 provide enough power to a growing economy.  Eskom 
 announced plans to pour R93 billion ($15.5 billion, using 
 6 rands per dollar) into creating new capacity over five 
 years, including restarting mothballed coal plants and 
 building gas-fired facilities and a pebble bed nuclear 
 reactor.  About 90% of South Africa's power comes from 
 coal, and 6% from Koeberg, Africa's only nuclear facility. 
 Eskom will increase electricity prices in 2006 by 5.1%, 
 followed by 5.9% and 6.2% in 2007 and 2008, respectively, 
 all above expected inflation rates.  Source:  SAPA, 
 Business Report, Business Day, and Reuters, February 22. 
 
 Crisis Team to Manage Cape Power Outages 
 ---------------------------------------- 
 
 ¶6.  A crisis committee will manage rolling blackouts in 
 the Western Cape Province as power cuts affect commercial 
 and industrial users as well as residential consumers. 
 Consisting of Eskom, the Cape Town City Council, the 
 Regional Electricity Distributor One (Red One) and the 
 provincial government, the committee will try to minimize 
 adverse economic effects of the rolling blackouts.  Eskom 
 announced the power cuts would last an extra two days past 
 its previous assurance that full power would be restored 
 by February 21.  Eskom CEO Thulani Gcabashe said the power 
 cuts were being extended because work to get Koeberg's 
 nuclear plant up and running had taken longer than 
 expected.  Saleem Mowzer, head of newly created Red One 
 said the distributor would be spending R180 million ($30 
 million) in 2006 on improving infrastructure.  Source: 
 Business Day, February 23. 
 
 South Africa and United Arab Emirates Exchange Skills 
 --------------------------------------------- -------- 
 
 ¶7.  As part of the Accelerated and Shared Growth 
 Initiative, the South African government announced a 
 placement and exchange program with the United Arab 
 Emirates (UAE).  The program will choose 100 women to work 
 for companies in the UAE to develop their skills.  The 
 women would work in the construction, banking and 
 hospitality industries.  Primarily, recently graduated 
 unemployed professionals, experienced women contractors 
 and business owners will be recruited for exchange.  The 
 government cites shortages of skills as a major constraint 
 to creating more jobs and increasing the long term growth 
 to 6%.  Source:  Business Day, February 23. 
 
 Proposed Moratorium of Land Sales to Foreigners No Problem 
 to Investors 
 --------------------------------------------- ------------- 
 
 ¶8.  Shadrack Gutto, the chairman of the government- 
 established panel of Experts on Foreign Ownership of Land, 
 asserted that the panel's proposed recommendation of a 
 moratorium on land sales to foreigners would not impact 
 foreign investors.  He cited studies from Chile, Brazil, 
 and Canada showing that controls on foreign land ownership 
 did not affect investor confidence as evidence of 
 investor's unconcern in domestic land sales procedures. 
 According to Gutto, foreigners sell after several years, 
 while investors are interested in security of tenure.  The 
 panel recommended a halt in land sales to foreigners as an 
 interim measure until the Department of Agriculture and 
 Land Affairs formulated new legislation.  It also 
 recommended new disclosure requirements applicable to both 
 corporations and individuals owning land.  Individuals 
 
PRETORIA 00000787  003 OF 003 
 
 
 would be required to disclose gender, nationality, and 
 citizenship.  Gutto states that the panel is still 
 considering whether disclosure of race will be required. 
 Agriculture and Land Affairs Minister Thoko Didiza should 
 receive the panel's final report either in April or May 
 ¶2006.  The Cabinet will have to accept the panel's 
 recommendations before implementation.  Source:  Business 
 Day, February 23. 
 
 Provincial Capital Spending Expected to Improve 
 --------------------------------------------- -- 
 
 ¶9.  Finance Minister Trevor Manuel expects provincial 
 under spending on capital projects to reach R800 million 
 ($133 million) during the current fiscal year.  During the 
 2004/05 fiscal year, provincial governments failed to 
 spend nearly R2 billion ($314 million at R6.36 per dollar, 
 the average 2005 exchange rate) of their R12 billion ($1.9 
 billion) total capital budget.  Manuel noted that R1.2 
 billion more had been spent on capital projects compared 
 to the previous fiscal year.  He cited improved 
 communication between the Departments of Education, Health 
 and Public Works as key to increasing provincial capital 
 spending.  The Division of Revenue Bill, determining the 
 split of funding between national, provincial and local 
 governments provides for 51% national share (R215 billion 
 or $35.8 billion of the R418.2 billion capital budget for 
 2006/07), 42% going to the provinces (R176.7 billion, or 
 $29.5 billion) and 6% (26.5 billion, or $4.4 billion) 
 allocated to municipalities.  Critics pointed to third 
 quarter 2005 figures showing that provinces spent only 55% 
 of their capital budget, as indications that provinces may 
 not be able to fully utilize this fiscal year's capital 
 budgets as much as Manuel expects.  Source:  Business Day, 
 February 20. 
 
 TEITELBAUM