SOUTH AFRICA ECONOMIC NEWSLETTER

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E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
SEPTEMBER 30 2005 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:

- Consumer Price Inflation Close to Market Expectations;
- Producer Prices Show Oil Price Impacts;
- Second Quarter 2005 Formal Employment Gains;
- GDP May be Underestimated;
- Second Quarter GDP Growth Rebounds;
- South Africa Slips One Spot in Global Competitiveness
Report; and
- Oil Prices and Rand Impact Inflation Target.
End Summary.

CONSUMER INFLATION CLOSE TO MARKET EXPECTATIONS
-------------- --


2. August consumer price inflation increased close to the
market consensus forecast and most analysts expect that
interest rates will remain unchanged throughout the rest
of 2005. Higher fuel prices drove August targeted
inflation rate (consumer prices excluding mortgage costs,
CPIX) to 4.8% from July's 4.2%. Consumer prices (CPI)
increased 3.9% from July's 3.4%. Market consensus
expected CPIX and CPI to increase by 4.9% and 4%,
respectively. Oil prices remain a significant risk to the
inflation outlook and inflation is expected to trend
higher in coming months to end 2005 at about 5%. The
single largest contributor to August consumer inflation
remained transport, which rose 1.9%. Fuel prices, which
rose 27 rand cents a liter in August, rose by another 29
rand cents a liter in September. Food prices declined to
2.6% year on year last month, after a sharp rise to 2.8%
in July. August's consumer inflation figures did not
provide conclusive evidence that high fuel costs were
spreading to the rest of the economy, though at some point
higher oil prices would drive up prices of other products
such as food and other consumables. Economists expected
that the CPIX would increase above 5% in September because
of oil prices. Source: Business Day, Business Report,
September 29; Investec CPIX Update, September 28.


3. Comment. On September 28, Finance Minister Trevor
Manuel said that he did not have serious concerns about
the effect of oil prices on economic growth or the balance
of payments. End Comment.

PRODUCER PRICES SHOW OIL PRICE IMPACTS
--------------


4. August producer prices (PPI) increased by 4.2%, up
from 3.6% in July, with petroleum and coal products
showing the largest increase. August's PPI inflation
matched market consensus forecasts at 4.2%. Domestic
producer prices increased by 3.6% and imported producer
prices increased 6.2% compared to July's increase of 3%
and 5.2%, respectively. With the exception of petroleum
and coal prices, other industries showed relatively mild
monthly price gains, another signal that higher oil prices
have not yet significantly affected domestic industries
that use energy. Besides July and August 2005, the last
time that monthly producer price inflation had been above
3% was in April 2003. Over the past 5 years, producer
prices increased 0.6% in 2004, 1.7% in 2003, 14.2% in
2002, 8.4% in 2001, and 9.2% in 2000. Source: Standard
Bank, PPI Alert; I-Net, September 29.

SECOND QUARTER 2005 FORMAL EMPLOYMENT GAINS
--------------


5. Statistics South Africa's (StatsSA) second release of
the Quarterly Employment Survey (QES) showed the total
number of employed people in the formal non-agricultural
sector increased by 131,000 in the second quarter of 2005,
increasing 1.9%. During the previous quarter, the number
of jobs created declined by 2.1%. Just over 7 million
people were employed by the formal non-agricultural sector
during the second quarter. Construction was the main
employment generator creating 46,000 jobs, followed by the
wholesale and retail trade sector, which created 29,000
jobs. In manufacturing, the number of jobs rose by
14,000, or 1.2%. Apart from the electricity, gas and
water supply industries, which were unchanged, all the
sectors surveyed showed growth. GDP increased 4.8% in the
second quarter, from 3.5% in the first, with manufacturing
and construction industries posting strong growth.
Source: Business Day and Business Report, September 28.

6. Comment. As of June 2005, the QES replaced the Survey
of Employment and Earnings, which did not include
employment in small companies. QES statistics are not
strictly comparable with those in Stats SA's biannual
Labor Force Survey which provides the official jobless
rate, and give a good indication of the economy's job-
creating performance. The QES is derived from a survey of
almost 24,500 businesses registered to pay income tax,
excluding those in the agriculture, hunting, forestry and
fishing sectors, while the Labor Force Survey involves
interviews with 30,000 households. End comment.

GDP MAY BE UNDERESTIMATED
--------------


7. Efficient tax collection by the South African Revenue
Service (SARS) was not enough to explain the strong
increase in Value Added Tax (VAT) receipts over the last
three years, resulting in the possibility that GDP could
be underestimated, according to Iraj Abedian, CEO of the
Pan-African Investment and Research Services. VAT
receipts have grown faster than GDP, suggesting that
consumption patterns have changed. South African Reserve
Bank figures showed high revenue collection in the first
quarter, with the government set to overrun its R369.9
billion ($60 billion, using 6.3 rands per dollar) revenue
target. SARS collected about R90.2 billion ($14 billion)
in the first quarter of the 2005/06 fiscal year, a yearly
increase of 19.6%. Abedian asserted the strong growth in
VAT revenue was partly explained by efficient tax
collection and an underestimation of the size of the
economy, but also by a shift in consumer spending
patterns. VAT receipts increased due to a switch from
zero-rated basic food products, such as fruit, vegetables,
brown bread and milk, to products such as fruit salad,
processed vegetables and white bread, which were taxed at
14%. A 10% shift in spending towards taxable food
substitutes resulted in VAT revenue rising nearly 5%. To
explain the current growth in VAT revenue, Abedian said
that expenditure should have shifted towards taxable
products by as much as 30%, leading to suspicions
concerning accurate coverage in national income and
product accounts. Source: Business Report, September 26.

SECOND QUARTER GDP GROWTH REBOUNDS
--------------


8. The latest Quarterly Bulletin (September 2005) from
the South African Reserve Bank presented a strong domestic
economy supported second quarter 2005 GDP growth of 4.8%,
up from first quarter growth of 3.5%. Real domestic
demand (excluding the foreign sector),in its 18th quarter
of positive growth, grew 4.9% in the second quarter 2005
compared to 1.7% during the previous quarter. Household
consumer spending increased 5.9% from 5.5% in the first
quarter. Demand for durable goods led consumer spending.
Real spending on durable goods increased from 12% in the
first quarter to 26.5% in the second, reflecting high
consumer confidence levels, low interest rates and
attractive sales incentives. Household disposable income
rose by 5.7% during the second quarter. Increased credit
financed consumer spending, with the household debt to
disposable income ratio reaching 61.8% in the second
quarter in comparison to 51.4% six quarters earlier.
Investment spending slowed in the second quarter,
increasing 5.7% from 10.1% in the previous quarter. In
the first quarter, public corporation investment was
boosted by South African Airlines' purchases of aircraft.
Gross saving as a percentage of GDP increased to 13.5% in
the second quarter from 13% in the first. South Africa's
savings rate is low compared with other emerging markets,
such as China, which has a savings rate of 50% of GDP.
The current account improved due to an increase in
exports. The current account deficit reached R51 billion
in the second quarter, or 3.4% of GDP from first quarter's
3.8% of GDP. Source: Business Day and Business Report,
September 23.

SOUTH AFRICA SLIPS ONE PLACE IN GLOBAL COMPETITIVENESS REPORT
-------------- --------------


9. In the World Economic Forum's (WEF) 2005 Global
Competitiveness Report, South Africa slipped one place to
42 out of 117 countries compared with last year's ranking
of 41. The WEF report praised South Africa's strong
macroeconomic policies; however, pointed to rising crime,
corruption and inability to adopt new information
technologies as reasons for the 2005 slippage in rankings.
Indicators showing access in South Africa to computers and
the internet and university enrollment rates declined,
while 20% of the forum's survey thought that an
inadequately trained workforce posed the greatest hurdle
to doing business in South Africa. China and India ranked
lower than South Africa, at 49 and 50, respectively, due
to institutional weaknesses (a category that includes
judicial independence, property rights and government
favoritism). WEF rankings are drawn from publicly
available data as well as the results from a survey of
11,000 business leaders in 117 countries. Source:
Business Day, September 29.

OIL PRICES AND RAND IMPACT INFLATION TARGET
--------------


10. Henry Flint, head of global markets research at
Standard Bank, highlighted the relationship between oil
prices, rand/dollar exchange rates and inflation targeted
by the South African Reserve Bank. Flint's model suggests
that CPIX could rise to over 7%, if oil prices remained at
$70 per barrel and the rand/dollar exchange rate averaged
6.4 over a year. If oil prices remained at $50 per barrel
and the exchange rate averaged no higher than 6.6 rands
per dollar for a year, then the CPIX 3% to 6% targeted
range would still be met. In the year to date, the rand
has averaged R6.31 rands per dollar and the oil price
averaged $54.30 a barrel; however, in the past two months
oil prices have averaged $63.80. At $60 per barrel and
the rand/dollar exchange rate averaging 6.4, inflation
should be above the 6% upper range. Flint expects a
weakening dollar, high commodity prices, and South Africa
to attract more emerging market investments as support of
continual rand strength. Source: Business Report,
September 29.

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