VZCZCXRO9990
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #2730/01 1870631
ZNR UUUUU ZZH
R 060631Z JUL 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4345
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 04 PRETORIA 002730 
 
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 
JUNE 30 2006 ISSUE 
 
 
¶1. (U) Summary.  Once every two weeks, 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: 
 
-  China agrees in principle to textile export cap 
-  Government to speed up land reform 
-  Inflation growing, but within target range 
-  Reserve Bank warns of future interest rate hikes 
-  Standard and Poor's reaffirms SA long-term 
   national scale ratings 
-  First quarter job growth slow 
-  Gauteng education budget may fall short of need 
-  Government expands healthcare subsidies 
-  Virgin launches credit card, cellular network 
-  Government approves Richards Bay smelter 
-  Eskom urges restructuring electrical 
   Distribution 
End Summary. 
 
China agrees in principle to textile export cap 
--------------------------------------------- -- 
 
¶2. (U) President Thabo Mbeki and Premier Wen Jiabaou 
announced on June 21 that China would restrict its 
textile exports to South Africa in order to preserve 
a role for struggling domestic producers. Although 
the details of the deal will be established by 
negotiations over the next month, Beijing publicly 
stated that it is willing to cap its exports at two- 
thirds the current level through 2008. This agreement 
will cover 31 categories of apparel and textiles, 
with individual restrictions placed upon 100 specific 
products. The short-term deal could allow South 
African textile manufacturers time to address their 
competitive weaknesses; however, the South African 
industry has been in decline for the last 15 years, 
with foreign competition representing only a portion 
of its woes. According to clothing companies and 
unions, South Africa lost 63,000 textile jobs over 
the last three years. South Africa faces both high 
unemployment (officially 27%, but 39% by a broader 
measure including discouraged workers) and a major 
current-account deficit. Sources: Business Day, June 
19; Forbes, June 21; Business Report, June 22; 
Financial Mail, IOL, June 23. 
 
Government to speed up land reform 
---------------------------------- 
 
¶3. (U) The Department of Agriculture and Land Affairs 
announced additional details on its plans to speed up 
stalled land reform. On June 17, Minister Lulu 
Xingwana pledged "drastic measures" to deal with 
recalcitrant owners of under-utilized land, though 
stressing that the government would take action 
solely through legal means, such as eminent domain. 
The Department declared that it plans to adopt an 
area-based approach that will focus on specific 
agricultural commodities demanded by the market and 
seek to consolidate infrastructure for more efficient 
local projects. In response, black and white farmers' 
organizations reaffirmed their support for land 
reform, provided that the government works with 
landowners and offers the training and material 
support necessary to improve the prospects for 
recipients of land. At present, most of the farms 
owned by beneficiaries of land reform fail have seen 
 sharp decreases in output. The government's goal 
is for black farmers to own 30% of South African 
farmland by 2014. Presently, 4% is black-owned. 
Sources: SABC, June 17; Herald Eastern Cape, 
June 18; Business Day, June 26 and 28; Reuters, 
June 26. 
 
Inflation growing, but within target range 
------------------------------------------ 
 
¶4. (U) Due largely to more expensive petroleum and 
food, CPIX (CPI adjusted for mortgage costs) 
annualized inflation rates rose from 3.7% year-on- 
year in April to 4.1 in May, in line with market 
 
PRETORIA 00002730  002 OF 004 
 
 
expectations. The increase confirms suspicions that 
the South African Reserve Bank (SARB) will increase 
interest rates as inflation continues to rise through 
the rest of 2006. The SARB maintains an inflation 
target range of 3-6%. In a troubling sign, however, 
the producer price index (PPI) rose 5.9% year-on-year 
in May from 5.5% in April. The PPI tends to lead 
consumer prices by several months. Sources: Mail 
and Guardian, June 29; Business Day, June 29-30. 
 
Reserve Bank warns of future interest rate hikes 
--------------------------------------------- --- 
 
¶5. (U) Tito Mboweni, South African Reserve Bank 
(SARB) Governor, warned on June 22 that a widening 
Current account deficit and unchecked consumer 
spending would likely lead to an increase in interest 
rates if the SARB is to keep inflation in check. 
Though dismissing fears that the economy is 
overheating and saying that "things generally look 
good," he expressed concern that a spate of 
conspicuous consumption indicated that borrowing 
is too cheap. Data released by the SARB that day 
showed that South Africa's current account deficit 
in the first quarter of 2006 widened to 6.4% Of 
GDP from 4.5% in the final quarter of 2005. 
The rand fell significantly in the wake of the 
announcement to R7.41/$, its lowest value in 29 
months. Source: IOL, Mail and Guardian, June 23. 
 
Standard and Poor's reaffirms SA long-term national 
scale rating 
--------------------------------------------- ----- 
 
¶6. (U) South Africa maintained its AAA long term 
National scale ratings from Standard & Poor's, 
Though the report expressed severe concern about 
several of the country's "structural socioeconomic 
weaknesses, including income disparities, poverty, 
high unemployment, and the unfolding HIV/AIDS 
pandemic." Standard & Poor's declared South Africa 
to have an overall stable outlook, maintaining its 
BBB+ long-term and A-2 short-term foreign currency 
ratings and an A+ long-term and A-1 short-term 
currency sovereign credit ratings. South Africa 
earned commendation for its cautious fiscal policy, 
continuing economic reforms, and expanding social 
services. Definitions of all ratings are available 
at www.standardandpoors.com. Source: iAfrica, 
Standard & Poor's, June 19. 
 
First quarter job growth slow 
----------------------------- 
 
¶7. (U) Statistics SA reported on Tuesday that the 
economy created 9000 formal non-agricultural jobs 
in the first quarter of 2006. Despite strong economic 
growth of 4.2% (annualized rate), seasonal job losses 
in the wholesale and retail sectors prevented the 
economy from making significant progress on 
unemployment. Gross earnings by employees fell by 
3.7%. While the modest employment rate increase 
(0.1%) is certainly preferable to the 152,000 jobs 
lost in the first quarter of 2005, it is still a 
disappointing fall from the 90,000 jobs created in 
the fourth quarter of 2005.  South African labor 
union Cosatu said in a statement that South Africa 
needed to double employment growth if it is to meet 
its goal of halving unemployment by 2014. Cosatu 
pledged to intensify its efforts to make growth more 
equitable through its Jobs and Poverty Campaign, 
claiming that the statistics demonstrated a growth 
strategy tailored for the elite. Source: Business 
Day, Mail and Guardian, SouthAfrica.info, June 28. 
 
Gauteng education budget may fall short of need 
--------------------------------------------- -- 
 
¶8. (U) The Wits University Education Policy Unit 
Issued a warning on June 19 that the public education 
budget for the Gauteng province, including both 
Johannesburg and Pretoria, may be insufficient for 
the challenges its schools face. Gauteng's population 
is growing Steadily due to migration from other 
 
PRETORIA 00002730  003 OF 004 
 
 
provinces, and its education system faces a severe 
shortage of classroom space. Source: Business Day, 
June 20. 
 
Government expands healthcare subsidies 
--------------------------------------- 
 
¶9. (U) The Department of Public Service and 
Administration announced on June 22 that it will 
increase subsidies for the Government Employees 
Medical Scheme (Gems), which presently covers only 
60% of the country's one million government employees. 
The government will now pay 100% of insurance premiums 
for employees earning less than R60,000/yr ($8225) 
and 75% for all others, though it capped subsidies 
at R1900 ($260) per month for each family and R500 
($68) for individuals. Sapphire, the cheapest 
insurance pack-age offered through Gems, costs R981 
per month for the average South African family of 
five.  The offer will cost roughly R6 billion 
($822.5 million) over the next three years, according 
to government estimates. Sources: BuaNews, Business 
Day, June 23. 
 
Virgin launches credit card, cellular network 
--------------------------------------------- 
 
¶10. (U) In a blaze of publicity, Richard Branson's 
Virgin Group launched two major brands in South 
Africa this week: its Virgin Money financial services 
and Virgin Mobile cellular network. Both divisions 
pledge to lower prices for consumers by taking on 
established, complacent industry players. Consumers 
can anticipate falling prices in both fields, as 
Virgin's dramatic market entry has already triggered 
fee cuts from rivals trying to maintain their market 
share. Rates for both credit cards and mobile phone 
services in South Africa are among the highest in the 
world, well above those in comparable markets. Virgin 
Money, while not yet fully operational, will 
ultimately offer customers the lowest credit card 
rates in South Africa as well as offering short-term 
insurance, investment services, and mortgages. Virgin 
Money is in a joint venture with Absa, one of South 
Africa's big four banks. Virgin Mobile SA, a R700 
million ($97 million) joint project with minor market 
player Cell C, will be the fourth brand in a market 
dominated by Vodacom and MTN. Sources: MoneyWeb, 
June 29; The Star, June 28; Financial Mail, June 30. 
 
Government approves Richards Bay smelter 
---------------------------------------- 
 
¶11. (U) The provincial government of KwaZulu-Natal 
granted Tata Steel permission to begin work on its 
proposed $87.5 million ferrochrome smelter in 
Richards Bay, an industrial center on South Africa's 
east coast, dismissing health and environmental 
concerns raised by local NGOs. During the four years 
of legal action, However, the government approved 
several restrictions on the company designed to 
safeguard the community. Construction will begin 
within a month, according to the corporation. 
Source: Pretoria News. 
 
Eskom urges restructuring electrical distribution 
--------------------------------------------- ---- 
 
¶12. (U) National electrical utility Eskom is calling 
for reform of the nation's local electricity 
distribution network, particularly in rural areas, 
lest the country face power failures. Eskom is 
embarking upon a major expansion of its generating 
capacity, but fears that its investments in power 
Plants and transmission lines are not being matched 
by local authorities. It estimates that two-thirds of 
municipalities under-fund electrical distribution. 
To address the problem, Eskom proposed that the 
government create seven regional electrical 
distributors (REDs), six based out of South Africa's 
major municipalities and the seventh to cover the 
remainder of the country, including rural areas 
lacking the resources to properly maintain their own 
distribution networks. The Energy Intensive Users 
 
PRETORIA 00002730  004 OF 004 
 
 
Group, an organization whose 25 members represent 
40% of South African electrical consumption, issued 
a statement in support of Eskom's proposal, citing 
the need for reliable national power. South Africa's 
electrical network suffered through the past year, as 
a maintenance shutdown of one of its nuclear reactors 
at Koeberg caused blackouts in the Western Cape. 
Source: iAfrica, Energy Intensive Users Group, 
June 22. 
 
TEITELBAUM