SOUTH AFRICA ECONOMIC NEWSLETTER MARCH 31 2006

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E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER MARCH 31 2006
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:

- February Inflation up 4.5%;
- February Producer Price Inflation Unchanged;
- 4th Quarter Growth Slows; Consumer Demand Still High;
- Skills Initiative Launched;
- Non-Agricultural Employment Grows 1.3%;
- Social Security Agency Begins Operations; and
- SA Slips in ICT Rankings.
End Summary.

February Inflation up 4.5%
--------------


2. Slightly lower than expectations, February targeted
inflation (consumer prices excluding mortgage costs, CPIX)
increased 4.5%, well within the South African Reserve
Bank's range of 3-6%. Reuters' poll of economists
expected February's CPIX inflation to be 4.7%. Overall
consumer price inflation reached 3.9% in February.
February CPIX inflation was higher than January's 4.3%
because of higher food and fuel costs, although the rate
of increase in food prices weakened in February. For both
December and January, food price inflation contributed 0.3
percentage points, while February food prices contributed
only 0.1 percentage points to CPIX monthly inflation. The
prices of clothing, footwear and communication equipment
showed monthly declines as these industries are impacted
by a strong rand, competition from low-cost producing
countries, and technological advances. By expenditure
group, the lowest quintile experienced the highest
inflation in February at 4.4%, while the very high
expenditure group saw a 4% inflation rate in the goods
they purchase. Source: Statistics SA Release P0141.1,
Reuters, Standard Bank, CPI Alert and Investec CPIX
Update, March 29.

February Producer Price Inflation Unchanged
--------------


3. February's producer price inflation increased by 5.5%,
unchanged from January 2006's annual change. Food,
transport and electrical machinery prices were higher in
February, while basic metals, electricity and non-
electrical machinery prices came in lower than January's
rate of increase leading to an overall unchanged inflation
rate. The producer prices for locally produced goods
increased by 5.1% compared to January's increase of 5.2%.
Prices of imported commodities increased 6.9% during
February from 6.4%, primarily due to a strong rand. The
February producer price inflation met market expectations,
with a Reuter's poll of economists expecting 5.5%
inflation as well. Source: Statistics SA Release,
P0142.1, March 30.

4th Quarter Growth Slows; Consumer Demand Still High
-------------- --------------


4. According to the South African Reserve Bank's (SARB)
Quarterly Bulletin, South African 4th quarter 2005 growth
slowed, primarily due to a substantial slowdown in
inventory investment. Gross domestic expenditures
increased 3.9% (q/q, seasonally adjusted) from the 3rd
quarter 2005's growth of 7.4%. Household consumption
remained strong, showing 6.8% growth during the last
quarter 2005 compared to the third quarter growth of 6.1%
growth. Government consumption expenditure growth more
than doubled in the 4th quarter, showing 14.7% growth from
5.5% growth during the 3rd quarter. Table 1 gives the
last two quarters' and 2005 annual growth rates of key
demand-side indicators, adjusted for inflation.
Table 1 Q3 2005 Q4 2005 2005
Household consumption 6.1% 6.8% 6.9%
Government consumption 5.5% 14.7% 5.6%
Gross fixed capital formation 7.0% 7.5% 8.0%
Gross domestic expenditures 7.4% 3.9% 5.9%
Exports 10.5% -4.1% 6.7%
Imports 21.6% -1.2% 10.1%
GDP 4.2% 3.3% 4.9%


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5. An increase in real disposable income supported the
strong increase in household consumption, but a
substantial portion of increased household spending was
financed by credit. During 4th quarter 2005, household
debt as a percentage of disposable income rose to 65.5%
from 63.5% in the previous quarter. Savings to disposable
income of households reached 0.1%, the lowest rate ever
reported. In a country with uneven distribution of wealth
and a small minority of the population with access to
credit, the debt may be concentrated in a relatively few
number of households. Other factors supporting the strong
growth in consumer spending are employment gains, wealth
effects of increasing asset prices, high consumer
confidence and low inflation and nominal interest rates.
During the 4th quarter, real gross fixed capital
investment showed strong growth, primarily due to a 15.5%
increase in capital outlays by public corporations.
Private sector capital formation increased 8%, while
capital formation by government grew at slower rates.


6. The trade deficit on goods and services improved in
the final quarter of 2005, narrowing to R10 billion from
R20.7 billion in the 3rd quarter. However if net service
income and current transfer payments were included, the
balance on current account widened to R71.6 billion in 4th
quarter 2005 compared to R68.4 billion during the 3rd
quarter. As a percentage of GDP, the current account
balance increased to 4.5% from 3rd quarter's 4.4% and for
2005, came in at 4.2% compared to 3.4% in 2004. The
current account deficits have been financed by capital
inflows. Source: Standard Bank QB Crux, Business Report
and Investec SARB Quarterly Bulletin Update, March 23.

Skills Initiative Launched
--------------


7. Deputy President Mlambo-Ngcuka announced the beginning
of a new skills initiative that would alleviate skills
shortages in South Africa. The Joint Initiative on
Priority Skills Acquisition (JIPSA) will identify
constraints in education and training and determine needed
skills in the short to medium time frame. JIPSA will
ensure that there are sufficient skills for the
implementation of the R372 billion ($60 billion, using 6.2
rands per dollar) three-year infrastructure development
program that is a crucial component to successful
implementation of the Accelerated and Shared Growth
Initiative of South Africa (ASGISA). According to Mlambo-
Ngcuka, South Africa wants to recruit skilled retirees and
underemployed workers in South Africa first, and then
extend the skill search overseas to foreigners and South
Africans who had left the country. In addition, South
Africa's Further Education and Training colleges will
receive extra funding as part of an effort to increase
artisan and technical skills. There are also program to
ensure sufficient city, urban and regional planning and
engineering skills; management and planning skills in
education, health and municipalities; and teacher training
in math, science, information and communication technology
and language competence. JIPSA, which has an initial
three-year lifespan, is made up of the joint task team,
chaired by the Deputy President, and a technical working
group, headed by Gwede Mantashe, General Secretary of the
National Union of Mineworkers. Other members of the joint
task team include the Ministers of Defense, Education,
Home Affairs, Labor, Public Service and Administration,
Public Enterprises, Science and Technology, Sport and
Recreation, and Trade and Industry. Business
representatives include Transnet's Maria Ramos, Eskom
Chief Executive Thulani Gcabashe, Unilever SA's Gail
Klintworth, Sasol's Pat Davies, Standard Bank's Jacko
Maree, BHP Billiton SA's Executive Chairman Vincent
Maphai, University of South Africa's Barney Pityana and
AngloGold Ashanti's Bobby Godsell. Godsell wants South
African companies to spend at least 5% of their labor
costs on skills development. Source: Business Report,
Business Day, March 28.

Non-Agricultural Employment Grows 1.3%
--------------


8. During the 4th quarter 2005, non-agricultural
employment grew by 1.3% (q/q),with the service sectors
showing the strongest growth, according to Statistics SA's

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Quarterly Employment Survey (QES). Mining and transport,
storage and communication industries showed the largest
4th quarter job losses at -2.3% and -1.2%, respectively.
The highest level of employment increases occurred in the
wholesale and retail trade sector (50,000) followed by the
financial services sector (30,000) and the construction
sector (11,000). In the mining sector, 10,000 jobs were
lost while the transport sector lost 4,000 jobs.
Manufacturing, employing 17% of non-agricultural workers,
reported a 0.8% increase or 10,000 jobs during the 4th
quarter. For 2005, 158,000 non-agricultural jobs were
created, contributing to a total of 7.3 million jobs.
Gross earnings increased 6.9% in 2005 compared to the end
of December in 2004. Table 2 shows annual growth in jobs
and output for 2005. Source: Statistics SA, Release
P0277.1 and Standard Bank, Labor QES, March 28.
Table 2
%Employment Growth Output Growth
Mining 6% -4.8% 3.1%
Manufacturing 17% 1.8% 4.1%
Construction 6% 20.6% 10.0%
Wholesale/Retail Trade 20% 3.1% 6.1%
Transport, Communication 4% 1.6% 5.6%
Finance/Real Estate 21% -0.7% 7.7%
Personal Services 25% 2.4% 2.5%
Total 2.2% 4.9%


9. Comment. Statistics SA replaced the previous survey
of non-agricultural firms, the Survey of Employment and
Earnings, with the QES in June 2005. The QES is a larger
survey of 24,000 firms registered for taxes and includes
firms in the small business sector. The Labor Force
Survey, conducted every six months using 30,000
households, provides the official unemployment rate. End
comment.

Social Security Agency Begins Operations
--------------


10. Social Development Minister Zola Skweyiya announced
that the new Social Security Agency will start to pay
social grants to beneficiaries in Gauteng, Western Cape
and Northern Cape provinces. The Department created the
new agency to distribute social grants after massive fraud
was uncovered. The Social Security Agency will assume
payment responsibility for the remaining provinces by
March 2007. Skweyiya announced that the Department's
Special Investigating Unit had had removed more than
130,000 fraudulent grant recipients from the grants
register, and saved R4.5 billion ($730 million). Source:
Business Report, March 29.

SA Slips in ICT Rankings
--------------


11. The World Economic Forum (WEF) has ranked South
Africa 37th out of 115 countries surveyed in its latest
network readiness index (NRI),compared to 2004's ranking
of 34. The NRI measures the country's ability to use
information and communications technology (ICT) for
development and increased competitiveness. The index
examines a country's macroeconomic, regulatory and
infrastructure environment; the readiness of individuals,
businesses and governments to use and benefit from ICT;
and its actual usage of the latest information and
communications technologies. South Africa, which leads
sub-Saharan Africa in network readiness, was ranked 35th
in the environmental component and 42nd in individual
usage. South Africa ranked highest in foreign technology
licensing, which the WEF ranked 3rd, its financial market
(12th),the effectiveness of its law-making bodies (13th),
the efficiency of its legal framework (8th),and
protection of property rights (19th). However, South
Africa ranked lowest in the quality of math and science
education (105th),the quality of the overall education
system (81st) and the shortage of engineers and scientists
(90th). In addition, shortage of telephone lines, poor
quality of competition in the internet service provider
industry and high monthly telephone subscription charges
also led to lower overall rankings. South Africa has less
than 5 million fixed telephone lines and also less than 5
million active computers. According to a report by World
Wide Worx released in 2005, 3.6 million people are using
the internet in South Africa out of an estimated

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population of 46 million. High telecommunications costs
serve as a barrier for South Africa to increase the
penetration of high speed internet access. Source:
Business Day, March 29.

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