SOUTH AFRICA ECONOMIC NEWSLETTER MAY 26 2006

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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
(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.

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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

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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.

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