SOUTH AFRICA ECONOMIC NEWSLETTER December 16 2005

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E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER December 16 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:

- November Consumer Inflation Comes in at Five-Month Low;
- Producer Prices Higher than Expected;
- Jobs Increase by 1.4%;
- Third Quarter Domestic Demand Strong;
- Survey Assesses SA Business Climate; and
- Fuel Shortages;
End Summary.

November Consumer Inflation Comes in at Five-Month Low
-------------- --------------


2. Consumer inflation slowed for the third consecutive
month, to its lowest level in five months, as falling
petrol prices put downward pressure on inflation.
According to Statistics SA (StatsSA),CPIX (consumer price
index excluding mortgage costs) slowed to 3.7% y/y,
compared with 4.4% in October. Overall consumer prices
(CPI) increased 3.4%, compared to 4% in October. Both
goods and services inflation slowed in November, and
second-round inflationary pressures from higher oil prices
were still not evident in the inflation numbers. Services
inflation continued to moderate, falling to 5% y/y, from
5.2% in October. In June, services inflation reached
6.1%. November goods price inflation eased to 3.1%, from
4.1% the previous month. The 0.1% month on month decline
in goods prices was driven mainly by falling transport
costs. The transport component declined 2% month on month
last month, bringing y/y growth to 6%. Vehicle running
costs, which capture movements in fuel prices, declined
3.3% during the month. The food component of the CPIX
rose 0.8%, bringing y/y growth to 2%. The consumer price
index is expected to end 2005 at about 4%, and average
4.5% in 2006. Administrative prices, those controlled and
monitored by government, slowed to 7.5% y/y, from 10% in
October. Source: Business Day, December 15.


3. Comment. For 27 consecutive months, consumer
inflation has remained within the South African Reserve
Bank's (SARB) targets of 3% and 6%. In recent months
inflation expectations have reached close to 6% as
international crude oil prices rose to record highs,
prompting South African monetary authorities to keep
interest rates unchanged. Inflation expectations are
likely to moderate in coming months, barring any oil-price
shocks. The rand's performance will be one of the key
factors in the outlook for inflation, and interest rates,
with the relatively strong rand mitigating the effect of
higher oil prices on the domestic economy. However, risks
to the inflation outlook remain, mainly in the form of
rising food prices, rising credit demand, and a rapidly
changing currency. The SARB's Quarterly Bulletin showed
that the ratio of the current account to gross domestic
product increased to 4.7% in the third quarter 2005, up
from 3.7% in the previous quarter, although the deficit
was financed by incoming capital flows. End comment.

Producer Prices Higher than Expected
--------------


4. November's producer price inflation rose by 4.5% y/y,
higher than the market's expectation of a 4.1% increase
and October's producer price inflation of 4.2%. The main
sources of producer price inflation by month came from
agricultural products rising 3.8% m/m, electrical
machinery increasing 2.8% m/m, mining and quarrying rising
1.8% m/m and manufactured food rising 1% on a monthly
basis. November's prices show a moderating impact of
lower oil prices, with petroleum prices falling by 2.9%
m/m. However, recent December oil price increases along
with food prices pose future inflationary risks. On a
monthly basis, imported producer prices increased less
than domestic in November, with producer inflation being
restrained by a relatively strong rand; domestic firms'
inability to increase prices due to excess production
capacity; low global inflation and increased competition
from low cost global manufacturing firms. Source:
Standard Bank PPI Alert and Investec PPI Update, December

15.

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Jobs Increase by 1.4%
--------------


5. South Africa's formal, non-agricultural employment
grew by 99,000 jobs in the third quarter 2005, increasing
by 1.4%, according to the Quarterly Employment Statistics
released by Statistics SA. Employment in 2005 has
increased steadily in the second and third quarter, after
dropping in the first quarter. During the first quarter,
jobs dropped by 152,000, or 2.1%; while in the second
quarter, the number of people employed rose 1.9%. During
the third quarter, no sector showed job losses. For the
third quarter 2005, the number of jobs created in
transport, storage and communication rose 4.1% (13,000
jobs) to 333,000. The construction industry reported a
quarterly increase of 11,000 employees, bringing the total
number of people it employs to 443,000. The economy's
second-largest sector, manufacturing, added 13,000
employees, an increase of 1.1% from the second quarter.
Mining and quarrying was the only sector that did not add
any jobs in the third quarter. Wholesale and retail
trade, repair of motor vehicles, and hotels and
restaurants reported a quarterly increase of 24,000
employees, or 1.7%. A quarterly increase of 16,000 was
recorded in the financial intermediation, insurance, real
estate and business services industry (1.1%),while the
community, social and personal services industry reported
a quarterly increase of 21,000 employees (1.2%). Source:
Business Day, December 14.


6. Comment. The quarterly employment survey replaced the
Survey of Employment and Earnings in June 2005. The
statistics are derived from a survey of about 24,500
businesses registered to pay income tax, excluding those
in agriculture, hunting, forestry and fishing. The
biannual Labor Force Survey includes all sectors. End
comment.

Third Quarter Domestic Demand Strong
--------------


7. Gross domestic expenditure (GDE) increased 6.2%
(seasonally adjusted and annualized) compared with the
second quarter increase of 0%, according to the South
African Reserve Bank's (SARB) December Quarterly Bulletin.
Household debt rose to 63.5% of disposable income from 61%
in the second quarter. SARB did not view the high level
of debt as problematic since the ratio of household debt
service payments to disposable income was 6.75%, only half
of its record high levels during 1998, when there were
considerable capital shortages. The sharp growth in GDE
was due to a broad-based growth in gross fixed capital
formation, increasing 7.1% compared to the second quarter
growth of 4.4%. Household consumption spending eased to
6.1%, compared to second quarter growth of 6.7%, primarily
due to slowing demand for durable goods. Growth in South
Africa's unit labor costs accelerated to 4.5% in the
second quarter of 2005 compared to first quarter's rise of
3.8%. Both quarterly increases are within the country's
3%-6% inflation target range. Source: Investec SARB
Quarterly Bulletin Update and Reuters, December 9.

Survey Assesses SA Business Climate
--------------


8. A joint South African government and World Bank survey
assessed the South African investment climate, enumerating
both major challenges and positive trends towards
achieving 6% long-run economic growth. Rigid labor laws,
little training provided by local firms, skills shortages,
and HIV/AIDS were cited as concerns by 800 local
businesses. While 77% of Brazil's, 80% of Poland's, 69%
of China's and 55% of India's skilled labor force received
company training, only 45% of South Africa's skilled
workers received training. The survey found that local
business did not find costs of regulation nor corporate
income taxes too high. South African senior managers
spent 10% of their time dealing with regulations, compared
to 25% spent in China. Direct losses due to crime and
security costs were higher in South Africa, although few
reported paying bribes and the legal system was rated
high. Low energy costs and access to finance were also
among the positive trends. HIV/AIDS was listed as a

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medium term concern; mainly related to uncertainty about
its effect on productivity, market size, profitability and
absenteeism. The report suggested that the lack of
foreign investors might be due to the way in which black
empowerment transactions are financed, using equity
transfers and not creating new capital. Source: Business
Day, December 14.

Fuel Shortages
--------------


9. Fuel shortages were reported in the Western Cape and
Gauteng provinces, starting December 10 and may extend to
January 2006, as a result of lead being phased out as of
January 1, 2006. Colin McClelland, the Director of the
South African Petroleum Industry Association, cited
unexpected reductions in refining production as reasons
for shortages in fuel. In the Western Cape, maintenance
shut-downs coinciding with adjustments to increase
production of unleaded gasoline caused shortages. In
addition, airports in Cape Town and George were severely
affected when the jet fuel delivered failed safety tests.
Recent statements by the Department of Minerals and Energy
Minister Lindiwe Hendricks indicated that the government
gave oil companies enough notice of the change in
regulations and would consider possible increased
regulation in the interests of public concern. Source:
Sunday Times, December 11; Pretoria News, December 12;
Business Day, December 15.

TEITELBAUM