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RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #2182/01 1501218
ZNR UUUUU ZZH
R 301218Z MAY 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3656
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 002182 
 
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 MAY 26 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: 
 
 -  April Consumer Prices Lower Than Expectations; 
 -  Producer Prices Continue to Rise; 
 -  Business Complains About Regulations Slowing Skill 
    Acquisition; 
 -  New Presidential Office to Monitor Government Regulations 
    for Small Business; 
 -  Revisions of GDP, CPIX and Labor Force Survey Planned; 
 -  Competition Commission Concludes that MIDP has not Helped 
    Vehicle Affordability; and 
 -  Industry Asserts Report on Car Prices Flawed. 
 End Summary. 
 
 April Consumer Prices Lower Than Expectations 
 --------------------------------------------- 
 
 ¶2.  April consumer inflation was lower than expected, 
 helped by a relatively stronger rand which suppressed 
 pressures coming from rising fuel prices.  Consumer prices 
 (CPI) increased by 3.3% in April, compared to March's 
 3.4%, while CPIX (consumer prices excluding mortgage 
 costs) increased 3.7% (y/y) from March's 3.8%.  A Reuters 
 poll of economists expected April's CPIX inflation to 
 reach 3.8%.  Price increases in transport, food and rental 
 costs explained much of April's overall CPIX increase. 
 Fuel prices are expected to be a heavy contributor to 
 future inflation, as they increased 39 (rand) cents in May 
 and June's fuel prices are expected to increase by an 
 additional 30 (rand) cents.  Economists believe inflation 
 will remain within the South African Reserve Bank's (SARB) 
 3%-6% target range; however, they do not expect easing 
 monetary policy in 2006, given the growing concern about 
 South Africa's current account deficit, strong growth in 
 household credit , volatility in oil prices, and weaker 
 rand.  The upcoming inflation expectations survey, 
 published by the Bureau for Economic Research, will 
 provide important insight into what may behind future SARB 
 decisions on interest rates.  CPIX has been within the 
 SARB's target range for 31 consecutive months.  Source: 
 Business Day and Business Report, May 25. 
 
 ¶3.  Comment.  South African real interest rates 
 (repurchase rate deflated by CPI) are 2.2 percentage 
 points above equivalent U.S. real interest rates.  South 
 Africa's real repurchase rate is now 3.7% (7% deflated by 
 3.3% CPI inflation in April, while the real U.S. federal 
 funds rate is 1.5% (5% federal funds rate deflated by 3.5% 
 U.S. April CPI inflation).  End comment. 
 
 Producer Prices Continue to Rise 
 -------------------------------- 
 
 ¶4.  In April producer prices rose by 5.5% (y/y) from 
 March's 5.4%, primarily due to increases in imported 
 producer prices.  April's increase turned out to be higher 
 than the 5.2% producer price inflation that the market 
 expected.  During the past six months, imported inflation 
 accounted for almost 40% of total y/y producer price 
 inflation, with mining and quarrying and petroleum prices 
 accounting for most of imported producer price inflation. 
 Increasing agricultural, electricity and food 
 manufacturing prices explained most of the 0.1% monthly 
 increase in producer price inflation.  For three out of 
 the first four months in 2006, producer price inflation 
 has been 5.5%.  Source:  Standard Bank, PPI Alert; Stats 
 SA Release P0142.1, May 25. 
 
 Business Complain About Regulations Slowing Skill 
 Acquisition 
 --------------------------------------------- ---- 
 
 ¶5.  According to South African businesses, regulations 
 prevent rapid acquisition of needed skills so that the 
 country's growth opportunities can be exploited.  Grant 
 Thornton South Africa's Chief Executive Officer Leonard 
 Brehm said that the burden of having to comply with so 
 many regulations fuels the general perception that the 
 growth in business opportunities in South Africa are not 
 being matched with sufficient growth in needed skills. 
 
PRETORIA 00002182  002 OF 003 
 
 
 Brehm maintains that the tax laws, employment laws and the 
 new international financial reporting standards are highly 
 complex, and South Africa does not have the resources at 
 either the government or business level to monitor them. 
 In addition, South Africa's immigration policy is not 
 straightforward, which adds additional complexity towards 
 acquiring scarce skills, according to Chris Watters, an 
 immigration lawyer.  The Home Affairs Department published 
 the national scarce and critical skills list in February 
 ¶2006.  Watters asserted that the intention of the list is 
 to promote economic growth, but some professions are in 
 more demand than others.  According to the list, South 
 Africa needs 1,000 plant pathologists, but doctors, nurses 
 and electrical engineers, all in short supply, are not 
 mentioned.  In addition, procedures needed to acquire 
 scarce skills are unclear.  Added to this is the time for 
 the South African Qualifications Authority to verify 
 professional qualifications and for immigrants to obtain a 
 clearance certificate from the police.  Moreover, before 
 recruiting a foreigner, a company must now advertise in 
 the national press, which results in further  delay. 
 Before 2004, there was an automatic exemption from local 
 advertising for key management staff.  Source:  Business 
 Day, May 25. 
 
 New Presidential Office to Monitor Government Regulations 
 For Small Business 
 --------------------------------------------- ------------ 
 
 ¶6.  Deputy President Mlambo-Ngcuka announced formation of 
 a new office within the Presidency that would monitor 
 government regulations for unintended constraining effects 
 on small businesses.  A review of regulations has begun, 
 with the view that those  hindering small business 
 development should be simplified.  These include 
 burdensome tax regulations as well as labor regulations. 
 In addition, the Department of Trade and Industry wants to 
 simplify the business registration process and improve on- 
 line access to registration materials and forms to reduce 
 the hassle of filling out forms and waiting in line. 
 Source:  SAPA and Business Day, May 24. 
 
 Revisions of GDP, CPIX and Labor Force Survey Planned 
 --------------------------------------------- -------- 
 
 ¶7.  Statistics SA (Stats SA) plans to revise three of 
 South Africa's key economic indicators - i.e., gross 
 domestic product (GDP), consumer prices, and the labor 
 force survey -- according to Stats SA Statistician-General 
 Pali Lehohla.  Two changes are planned for the consumer 
 price index.  Firstly, instead of requiring shopkeepers to 
 fill in and return forms, employees of Stats SA will go to 
 each store and fill in the form themselves.  Secondly, 
 the basket of items on which the index is based will be 
 reweighted in 2008, to take into account the result of a 
 new income and expenditure survey which will show how 
 spending patterns have changed.  The last such reweighting 
 occurred in 2000.  In addition, Stats SA is planning to 
 conduct a poverty survey  and a national community survey, 
 which would involve visiting 280,000 households in 
 February 2007.  These exercises should help to inform 
 howthe next general census to be conducted in 2011. 
 Source:  Business Report, May 25. 
 
 Competition Commission Concludes that MIDP has not Helped 
 Vehicle Affordability 
 --------------------------------------------- ------------ 
 
 ¶8.  According to the Competition Commission, the Motor 
 Industry Development Program (MIDP) has improved exports 
 and employment, but has not improved vehicle 
 affordability, one of the program's key objectives.  As a 
 result, the Commission recommended a decline in vehicle 
 tariffs.  The commission recommended that the tariff on 
 completely built-up (CBU) vehicles be reduced to a maximum 
 of 20% and the tariff on imported components by a similar 
 margin, since the Commission found that domestic car 
 prices were inflated by at least 14%.  The Commission 
 believed that with tariff protection of 20%, the industry 
 would be able to continue to protect and enhance output, 
 exports and employment while offering reduced prices to 
 consumers.  The Commission reported late in 2005 that it 
 could not pursue a case of excessive pricing because none 
 of the motor companies could be defined as dominant in 
 
PRETORIA 00002182  003 OF 003 
 
 
 terms of the Competition Act.  The Act equates company 
 dominance with a market share of at least 35%.  The 
 excessive pricing investigation formed part of the 
 commission's wider investigation into price-fixing and 
 collusion in the motor industry, which led to eight 
 manufacturers, importers and/or their agents reaching 
 consent order agreements with the Commission and being 
 fined a total of R51.65 million.  Source:  Business 
 Report, May 22. 
 
 Industry Asserts Report on Car Prices is Flawed 
 --------------------------------------------- -- 
 
 ¶9.  The motor vehicle industry criticized the methodology 
 and assumptions used by the Competition Commission in the 
 automotive comparative pricing study.  According to Nico 
 Vermeulen, Executive Director of the National Association 
 of Automobile Manufacturers of SA, the sample size of only 
 six vehicles was not representative of the market.  In 
 addition, Vermeulen claimed that the report assumed that 
 motor manufacturers did not pay any duties, though a 
 number of manufacturers paid significant duties.  The 
 Commission's analysis also did not make any allowance for 
 the relative size of the European Union (EU) and South 
 African markets, and the impact that small market size had 
 on costs .  Finally, the analysis did not benchmark 
 products of independent importers,  compare South Africa 
 to  other developing countries, nor take into account the 
 impact of historical exchange rates and inflation 
 differentials between South Africa and the EU. 
 Vermeulen said that the report only benchmarked South 
 African vehicle prices against European, using higher 
 priced sedans to sample for vehicle affordability. 
 Source:  Business Report, May 22. 
 
 TEITELBAUM