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RUCPCIM/CIMS NTDB WASHDC
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UNCLAS SECTION 01 OF 03 PRETORIA 002069 
 
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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 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
PGOV, SF 
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER JUNE 08, 2007 
ISSUE 
 
 
¶1. (U) Summary.  This is Volume 7, issue 23 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- Inflation Data Shocks Economists 
- Consumers Continue To Borrow 
- GDP Growth Slows To 4.7% 
- State Raises Offer As Strike Bites 
- Vehicle Sales Slow Down 
- The MPC Hikes Interest Rate 
- Green Tax On Sports Vehicles 
End Summary. 
 
-------------------------------- 
Inflation Data Shocks Economists 
-------------------------------- 
 
¶2. (U) Data released by Statistics South Africa (StatsSA) showed 
that South Africa's targeted CPIX inflation (consumer price 
inflation, excluding mortgage interest rates), quickened to 6.3% in 
the year to April, the highest rate in nearly four years and above 
the South African Reserve Bank's 3-6% target band.  Local economists 
reacted with shock to the latest consumer inflation data. Reuters 
reports the data knocked government bonds and the rand currency, 
with the market further discounting an expected interest rate 
increase at the Reserve Bank's June 6-7 policy meeting.  The rand 
weakened from R7.17/$ to R7.19/$ before the release, while yield on 
the short-dated R153 bond due in 2010 jumped to its highest level 
since December last year, a rise of 14 basis points to 8.3% on the 
day.  The increase in CPIX inflation was underpinned by the large 
increase in fuel prices in April and the continued price pressure in 
the food component.  Domestic fuel prices surged by 69c/litre in 
April following a significant weakening in the rand during March and 
a further strengthening in international crude oil prices, which 
exceeded $60 per barrel in March.  The rand oil price during March 
averaged R458/bl compared with R420/bl in February and less than 
R400/bl in January.  Meanwhile, food prices have been negatively 
impacted by the drought and accelerated from 7.7% in March to 8.4% 
in April, driven by a 9.9% increase in grain prices and an 11.1% 
rise in meat prices.  The inflation rate of dairy products and other 
food products also accelerated.  (Fin24, May 30, 2007) 
 
---------------------------- 
Consumers Continue To Borrow 
---------------------------- 
 
¶3. (U) South African Reserve Bank data showed that private sector 
credit extension (PSCE) accelerated from 24.1% in March to 25.1% in 
April, above market expectations of 23.9%.  Broad money supply (M3) 
also picked up, rising from 20% in March to 22.3% in April. 
Economists said a combination of these data and the inflation 
figures will lead the Reserve Bank to want to not only contain 
borrowing but to contain inflation expectations as well.  Strong 
domestic demand has pushed household debt to a record 73.8% of 
disposable income in the fourth quarter last year, adding to 
inflationary pressures.  (Business Day, May 31, 2007) 
 
------------------------ 
GDP Growth Slows To 4.7% 
------------------------ 
 
¶4. (U) According to Statistics South Africa (StatsSA) data, economic 
growth slowed to an annualized 4.7% in the first quarter of 2007, 
from 5.6% in the fourth quarter of 2006 and in line with 
expectations.  Analysts said the growth, while slower, showed the 
economy remains on a solid footing.  Strong financial services, 
manufacturing and retail activity, along with particularly vigorous 
construction activity, all served to sustain GDP growth. However, 
the mining and quarrying sector contracted by 7.8%.  The 
construction industry was the star performer in the first quarter of 
2007, growing by an annualized 21.3%, proof that the public sector's 
huge infrastructure spending program is getting off the ground.  It 
was the 34th consecutive quarter of positive growth since 1998, 
although the impact of interest rate increases since June 2006 has 
brought the pace of growth down.  Africa's biggest economy has 
expanded by around 5% a year for the past three years, largely due 
to robust consumer spending and global demand.  (Fin 24, May 29, 
2007) 
 
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PRETORIA 00002069  002 OF 003 
 
 
State Raises Offer As Strike Bites 
---------------------------------- 
 
¶5. (U) The South African government has tabled a new package for 
public servants in an attempt to end a strike that has nearly 
crippled government service delivery.  The offer, which includes a 
wage increase of 6.5%, up from the previous offer of 6%, was 
rejected by unions.  They want "substantial" across-the-board 
increases.  Labor is demanding a 12% increase.  The Department of 
Public Service and Administration said the 6.5% increase for the 
2007-08 financial year took into account average projected CPIX 
(consumer inflation excluding mortgages) for the period plus a real 
salary increase.  For 2008-09, the general salary increase would be 
CPIX plus 0.5%. The offer would cost R13.7billion ($2 billion), an 
improvement from the R9.3 billion ($1.3 billion) that was initially 
offered.  The current total package for a level-one public servant 
is R69,282 ($9,900) and in the new offer would be R76,122 ($10,870). 
 The government's offer also includes revised salary structures for 
the next four years as well as increases in certain allowances. 
However, union negotiators said they believed the offer to improve 
the total package over the next four years was too vague. 
Economists warned that above-inflation pay demands will definitely 
put pressure on inflation and could cancel out the benefit of wage 
increases.  Meanwhile, the strike has already had an impact on the 
economy, with the education and health sectors the worst affected. 
(Business Day June 5, 2007) 
 
----------------------- 
Vehicle Sales Slow Down 
----------------------- 
 
¶6. (U) According to the National Association of Automobile 
Manufacturers of SA (NAAMSA), 51,683 vehicles were sold in May 2007, 
1.7% lower than in May 2006.  Analysts said last year's interest 
rate hikes, car price inflation and high personal debt have 
continued to put a damper on new vehicle purchases.  NAAMSA said 
this was the first time in just less than four years that there had 
been a year-on-year decline in vehicle sales for four consecutive 
months.  While only 31,490 passenger vehicles were sold in May 2007, 
10% lower than the same month last year, robust economic activity 
continued to drive demand for light commercial vehicles, with 16,904 
units sold in May, 15.6% up on the May sales figures of last year. 
Strong private and public investment also helped medium and heavy 
trucks maintain momentum, with the two segments showing growth of 
6.4% and 19%, respectively. "The strong investment cycle was 
expected to keep new commercial vehicle sales afloat, "NAAMSA said. 
Finally, the 14,787 units exported in May 2007 were 4.9% above than 
the corresponding month last year.  (Business Day, June 5, 2007) 
 
--------------------------- 
The MPC Hikes Interest Rate 
--------------------------- 
 
¶7. (U) Following two successive meetings of the South African 
Reserve Bank's Monetary Policy Committee (MPC) where interest rates 
were left unchanged, the MPC finally decided to adjust the repo rate 
upwards by 50 basis points.  The repo rate was adjusted to 9.5%, 
which was in line with market expectations.  Major commercial banks 
are expected to adjust the prime overdraft rate from 12.5% to 13%. 
High and volatile international oil prices, rising food prices, 
robust household consumption expenditure growth and deteriorating 
inflation expectations (aggravated by the ongoing strike) were 
signaling that a rate hike was in the pipeline. The deterioration 
was also evident in the bond market, where long-term yields have 
increased further.  The MPC statement left the door open for further 
interest rate hikes as the MPC expressed its willingness to act in 
order to contain inflationary pressures and keep the inflation rate 
below 6%.  With international oil prices still around $70/bl, the 
rand still volatile and above R7 against the dollar, and food prices 
rising, the risk to higher interest rates on the back of higher 
inflation remains firmly on the upside.  (ABSA Newsletter, June 7, 
2007) 
 
---------------------------- 
Green Tax On Sports Vehicles 
---------------------------- 
 
¶8. (U) Department of Minerals and Energy (DME) Director of Energy 
Efficiency Dr. Elsa Du Toit reported that the DME is proposing to 
introduce a 33% tax on the selling price of large, petrol-consuming 
 
PRETORIA 00002069  003 OF 003 
 
 
sports utility vehicles (SUV), and to double the annual license 
fees.  Du Toit said the aim of imposing the green tax would be to 
mitigate environmental degradation impacts and to reduce fuel 
consumption by 12 percent by 2015.  Ever-increasing fuel prices and 
escalating interest rates have not discouraged the South African 
middle class' robust appetite for big cars, which are regarded as 
heavy polluters.  According to De Toit, reports show that SUVs 
consume double the amount of fuel compared to an ordinary sedan, 
while emitting 9,000 kg of carbon dioxide compared to 4,500 kg for 
lighter cars.  Du Toit said market forces are not working, which 
makes it necessary to follow the global practice of imposing 
punitive measures to enforce behavioral change in people.  If DME 
endorses this additional "energy efficiency levy," a vehicle that 
costs $119,700 could have an additional tax of $39,400, plus a 100 
percent levy on annual license fees.  Environmental activist groups 
welcome DME's proposal to establish the green tax, while automotive 
industry economists argue that the levy appears to be too steep and 
could put some jobs at risk.  DME's comprehensive energy efficiency 
strategy targets energy consumption reductions in industrial, 
mining, power generation, commercial and public sector buildings by 
15 percent, and transportation and residential sectors by nine and 
ten percent, respectively.  DME intends to achieve these goals by 
promoting renewable energy alternatives, incentives and rebates. 
(Business Day and Pretoria News, May 23, 2007) 
 
BOST