SOUTH AFRICA ECONOMIC NEWSLETTER

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TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
DECEMBER 23, 2004 ISSUE



1. Summary. Each week, AMEmbassy 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:
- Consumer Prices Increase Slightly Above Expectations;
- Western Cape Looks at Increasing Taxes;
- ICASA Proposes New Price Cap;
- Strong Rand May Subdue Inflation;
- Court Rules Against Pharmaceutical Pricing Regulations;
and
- South Africa's Leading Business Indicator Still
Increasing.
End Summary.

CONSUMER PRICES INCREASE SLIGHTLY ABOVE EXPECTATIONS
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2. In November, both overall consumer prices (CPI) and
targeted inflation (CPIX, consumer prices less mortgages)
increased above market expectations and above last month's
inflation. CPI and CPIX increased 3.7 percent (y/y) and
4.6 percent, slightly above the market expectations of 3.6
and 4.4 percent, and above October's increases of 2.4 and
4.2 percent, respectively. Targeted inflation (CPIX) is
expected to slow to 4 percent over the next three months
as relatively lower expected fuel costs and the strong
rand keep inflation under control. Major reasons for the
4.6 percent increase in CPIX include: (1) annual
increases in the price indices for transport (+1.1
percentage points); (2) housing (+0.8 of a percentage
point); (3) medical care and health expenses (+0.7 of a
percentage point); (4) food (+0.5 of a percentage point);
(5) education (+0.4 of a percentage point); (6) fuel and
power (+0.3 of a percentage point); and (7) household
operation (+0.3 of a percentage point). Source: Nedbank,
Economic Research; I-Net Bridge, December 22.


3. Comment. While November inflation figures were
slightly higher than expected, the strong rand will
support a favorable short-term inflation outlook. Recent
lower oil prices will also lead to further expectations of
interest rate reductions during the next Monetary Policy
Committee meeting in February. End comment.

WESTERN CAPE LOOKS AT INCREASING TAXES
--------------


4. Western Cape is considering increasing hospitality and
commercial property development taxes as a way of
generating development funds for the province. The
additional income is expected to offset the pressures
escalating social spending is placing on the provincial
economic development budget. The studies investigating
the feasibility of these new taxes should be completed by
next year for the national government's approval. The
province has applied to the National Treasury for the
approval to charge a fuel levy of 10 rand cents/liter on
motorists, which will raise about R300 million ($53
million, using 5.7 rands per dollar) for road, rail and
other economic infrastructure maintenance. If the
province gets approval, the taxes may be imposed by the
end of next year. A 10 percent tax on commercial property
development would raise about R250 million ($44 million)
annually on this year's provincial development projects of
about R2.5 billion ($440 million) for social housing and
property development in low-income areas, while a
hospitality tax could raise about R100 million ($17
million) annually for use in training and marketing of
Western Cape's tourism industry. Source: Business Day,
December 20.

ICASA PROPOSES NEW PRICE CAP
--------------


5. The Independent Communications Authority of South
Africa (ICASA) is proposing that future price increases of
Telkom (the telecommunication parastatal) be limited to
four percentage points below the rate of the CPIX
(consumer inflation less mortgages),used as the inflation
target by the South African monetary authorities.
Currently, the regulations state that Telkom caps its
annual price increase to 1.5 percentage points below
targeted inflation. According to Telkom, the company's
revenue would fall by R625 million ($110 million) if the
new price-capping regulations were approved. (Telkom
stated that a percentage point price increase translated
into an increase in revenue of R250 million ($44
million)). Telkom itself proposed a cap of two percentage
points below inflation. In 2003, Telkom received R40.6
billion ($5.4 billion, using 7.56, the average 2003 rand
per dollar exchange rate) in revenues and an operating
profit of R9.2 billion ($1.2 billion). Telkom has already
filed a new price list for January 1 that lifts the cost
of local calls by 5.5 percent and raises the cost of an
overall basket of services by 0.15 percent. However, those
price changes would have to be amended under the new
rules. ICASA hopes Communications Department Minister
Matsepe-Casaburri will approve its new regime in January,
and it would ask Telkom to file new tariffs within 30
days. Telkom said if it must alter its tariffs again, it
should have until August 1, which would be less
"confusing," and would let its new prices be calculated on
its financial figures for the year to next March. Source:
Business Day, December 20.

STRONG RAND MAY SUBDUE INFLATION
--------------


6. The rand's renewed surge in the past two months has
improved the inflation outlook for 2005 despite strong
domestic spending, surging credit demand and rising unit
labor costs. The rand has gained about 12 percent
against a basket of trade-weighted currencies since the
beginning of the year, and is expected to remain firm next
year on the back of dollar weakness. According to Nedcor
bank economists, the rand strength will hold into 2005
because of expected high commodity prices, positive
investment sentiment due to potential sovereign risk
rating upgrades, lower interest rates and stronger local
growth. According to a group of economists surveyed by I-
Net Bridge, CPIX is expected to edge up to 4.3 percent
year on year in November, while producer price inflation
should increase 2.3 percent year on year from 1.9 percent
in October. According to Nedcor bank, the rand is
expected to gain a further 10 percent against the dollar
in 2005. Source: December 20, Business Day.

COURT RULES AGAINST PHARMACEUTICAL PRICING REGULATIONS
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7. The Supreme Court of Appeal ruled against the
Department of Health's pharmaceutical pricing regulations
by stating that the proposed dispensing fees were not
appropriate. According to the court, the regulations did
not consider the viability of the dispensing industry and
the single exit price introduced a price control
mechanism, which the Medicines and Related Substances Act
had not intended. The Department of Health raised
jurisdictional issues since the Cape High Court denied the
industry a chance of appeal. The Supreme Court of Appeal
dismissed these issues of jurisdiction by ruling that the
Cape High Court's delay in granting leave to appeal was so
unreasonable as to breach the constitutional right to a
fair hearing. The regulations provided for a pricing
system that defined a single exit price of manufacturers
and a dispensing fee, which, for pharmacists, amounted to
R16 without a medical prescription and R26 with a
prescription. The court did not challenge government's
right to administer prices but stated that the lack of any
document describing how dispensing fees were calculated
meant that the government did not consider the long-term
viability of the retail drug sector. The Health Department
was ordered to pay the court costs. Source: Independent
Foreign Service, December 20; Business Day, December 21.


8. Comment. The Health Department plans to file an
appeal against this court judgment in the Constitutional
Court (equivalent to the U.S. Supreme Court),stating that
international experts regarded the pricing regulations as
reasonable and beneficial to consumers. According to the
department, the single exit price set by drug
manufacturers since June 2004 reduced the price of
medicines by 19 percent. Drug retailers have long argued
that the dispensing fee set by the government was so low
that many retailers would be forced to close. Until the
Constitutional Court rules, the existing price regulations
have been rescinded and pharmacists are again entitled to
charge varied dispensing fees, while manufacturers can
charge different prices to different buyers. End comment.

SOUTH AFRICA'S LEADING BUSINESS INDICATOR STILL INCREASING
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9. South Africa's leading business cycle indicator is
still showing growth, increasing to 115.5 in October,
after September's rise to 115.1. The business cycle
indicator has been rising since May 2003, as the economy
is experiencing economic growth above inflation. The
third quarter GDP growth of 5.6 percent is significantly
higher than October's 4.2 percent CPIX's (consumer prices
less mortgage costs) increase. Economic data and business
confidence over the past few months point to a
continuation of strong economic growth. The export sector
has shown growth, but strong domestic demand has supported
continued manufacturing growth. The leading indicator
signals possible changes in the business cycle by six to
twelve months and uses information on value of orders, job
advertisements, productivity and average hours worked per
factor worker as its components. Source: Business Day,
December 21.

FRAZER