SOUTH AFRICA ECONOMIC NEWSLETTER MAY 26 2006

UNCLAS SECTION 01 OF 03 PRETORIA 002182 SIPDIS SIPDIS 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 E.O. 12958: N/A TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER MAY 26 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: - April Consumer Prices Lower Than Expectations; - Producer Prices Continue to Rise; - Business Complains About Regulations Slowing Skill Acquisition; - New Presidential Office to Monitor Government Regulations for Small Business; - Revisions of GDP, CPIX and Labor Force Survey Planned; - Competition Commission Concludes that MIDP has not Helped Vehicle Affordability; and - Industry Asserts Report on Car Prices Flawed. End Summary. April Consumer Prices Lower Than Expectations -------------- ¶2. April consumer inflation was lower than expected, helped by a relatively stronger rand which suppressed pressures coming from rising fuel prices. Consumer prices (CPI) increased by 3.3% in April, compared to March's 3.4%, while CPIX (consumer prices excluding mortgage costs) increased 3.7% (y/y) from March's 3.8%. A Reuters poll of economists expected April's CPIX inflation to reach 3.8%. Price increases in transport, food and rental costs explained much of April's overall CPIX increase. Fuel prices are expected to be a heavy contributor to future inflation, as they increased 39 (rand) cents in May and June's fuel prices are expected to increase by an additional 30 (rand) cents. Economists believe inflation will remain within the South African Reserve Bank's (SARB) 3%-6% target range; however, they do not expect easing monetary policy in 2006, given the growing concern about South Africa's current account deficit, strong growth in household credit , volatility in oil prices, and weaker rand. The upcoming inflation expectations survey, published by the Bureau for Economic Research, will provide important insight into what may behind future SARB decisions on interest rates. CPIX has been within the SARB's target range for 31 consecutive months. Source: Business Day and Business Report, May 25. ¶3. Comment. South African real interest rates �A; (repurchase rate deflated by CPI) are 2.2 percentage points above equivalent U.S. real interest rates. South Africa's real repurchase rate is now 3.7% (7% deflated by 3.3% CPI inflation in April, while the real U.S. federal funds rate is 1.5% (5% federal funds rate deflated by 3.5% U.S. April CPI inflation). End comment. Producer Prices Continue to Rise -------------- ¶4. In April producer prices rose by 5.5% (y/y) from March's 5.4%, primarily due to increases in imported producer prices. April's increase turned out to be higher than the 5.2% producer price inflation that the market expected. During the past six months, imported inflation accounted for almost 40% of total y/y producer price inflation, with mining and quarrying and petroleum prices accounting for most of imported producer price inflation. Increasing agricultural, electricity and food manufacturing prices explained most of the 0.1% monthly increase in producer price inflation. For three out of the first four months in 2006, producer price inflation has been 5.5%. Source: Standard Bank, PPI Alert; Stats SA Release P0142.1, May 25. Business Complain About Regulations Slowing Skill Acquisition -------------- -------------- ¶5. According to South African businesses, regulations prevent rapid acquisition of needed skills so that the country's growth opportunities can be exploited. Grant Thornton South Africa's Chief Executive Officer Leonard Brehm said that the burden of having to comply with so many regulations fuels the general perception that the growth in business opportunities in South Africa are not being matched with sufficient growth in needed skills. PRETORIA 00002182 002 OF 003 Brehm maintains that the tax laws, employment laws and the new international financial reporting standards are highly complex, and South Africa does not have the resources at either the government or business level to monitor them. In addition, South Africa's immigration policy is not straightforward, which adds additional complexity towards acquiring scarce skills, according to Chris Watters, an immigration lawyer. The Home Affairs Department published the national scarce and critical skills list in February ¶2006. Watters asserted that the intention of the list is to promote economic growth, but some professions are in more demand than others. According to the list, South Africa needs 1,000 plant pathologists, but doctors, nurses and electrical engineers, all in short supply, are not mentioned. In addition, procedures needed to acquire scarce skills are unclear. Added to this is the time for the South African Qualifications Authority to verify professional qualifications and for immigrants to obtain a clearance certificate from the police. Moreover, before recruiting a foreigner, a company must now advertise in the national press, which results in further delay. Before 2004, there was an automatic exemption from local advertising for key management staff. Source: Business Day, May 25. New Presidential Office to Monitor Government Regulations For Small Business -------------- -------------- ¶6. Deputy President Mlambo-Ngcuka announced formation of a new office within the Presidency that would monitor government regulations for unintended constraining effects on small businesses. A review of regulations has begun, with the view that those hindering small business development should be simplified. These include burdensome tax regulations as well as labor regulations. In addition, the Department of Trade and Industry wants to simplify the business registration process and improve on- line access to registration materials and forms to reduce the hassle of filling out forms and waiting in line. Source: SAPA and Business Day, May 24. Revisions of GDP, CPIX and Labor Force Survey Planned -------------- -------------- ¶7. Statistics SA (Stats SA) plans to revise three of South Africa's key economic indicators - i.e., gross domestic product (GDP),consumer prices, and the labor force survey -- according to Stats SA Statistician-General Pali Lehohla. Two changes are planned for the consumer price index. Firstly, instead of requiring shopkeepers to fill in and return forms, employees of Stats SA will go to each store and fill in the form themselves. Secondly, the basket of items on which the index is based will be reweighted in 2008, to take into account the result of a new income and expenditure survey which will show how spending patterns have changed. The last such reweighting occurred in 2000. In addition, Stats SA is planning to conduct a poverty survey and a national community survey, which would involve visiting 280,000 households in February 2007. These exercises should help to inform howthe next general census to be conducted in 2011. Source: Business Report, May 25. Competition Commission Concludes that MIDP has not Helped Vehicle Affordability -------------- -------------- ¶8. According to the Competition Commission, the Motor Industry Development Program (MIDP) has improved exports and employment, but has not improved vehicle affordability, one of the program's key objectives. As a result, the Commission recommended a decline in vehicle tariffs. The commission recommended that the tariff on completely built-up (CBU) vehicles be reduced to a maximum of 20% and the tariff on imported components by a similar margin, since the Commission found that domestic car prices were inflated by at least 14%. The Commission believed that with tariff protection of 20%, the industry would be able to continue to protect and enhance output, exports and employment while offering reduced prices to consumers. The Commission reported late in 2005 that it could not pursue a case of excessive pricing because none of the motor companies could be defined as dominant in PRETORIA 00002182 003 OF 003 terms of the Competition Act. The Act equates company dominance with a market share of at least 35%. The excessive pricing investigation formed part of the commission's wider investigation into price-fixing and collusion in the motor industry, which led to eight manufacturers, importers and/or their agents reaching consent order agreements with the Commission and being fined a total of R51.65 million. Source: Business Report, May 22. Industry Asserts Report on Car Prices is Flawed -------------- -- ¶9. The motor vehicle industry criticized the methodology and assumptions used by the Competition Commission in the automotive comparative pricing study. According to Nico Vermeulen, Executive Director of the National Association of Automobile Manufacturers of SA, the sample size of only six vehicles was not representative of the market. In addition, Vermeulen claimed that the report assumed that motor manufacturers did not pay any duties, though a number of manufacturers paid significant duties. The Commission's analysis also did not make any allowance for the relative size of the European Union (EU) and South African markets, and the impact that small market size had on costs . Finally, the analysis did not benchmark products of independent importers, compare South Africa to other developing countries, nor take into account the impact of historical exchange rates and inflation differentials between South Africa and the EU. Vermeulen said that the report only benchmarked South African vehicle prices against European, using higher priced sedans to sample for vehicle affordability. Source: Business Report, May 22. TEITELBAUM