SOUTH AFRICA ECONOMIC NEWSLETTER

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SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
JUNE 30 2006 ISSUE



1. (U) Summary. Once every two weeks, 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:

- China agrees in principle to textile export cap
- Government to speed up land reform
- Inflation growing, but within target range
- Reserve Bank warns of future interest rate hikes
- Standard and Poor's reaffirms SA long-term
national scale ratings
- First quarter job growth slow
- Gauteng education budget may fall short of need
- Government expands healthcare subsidies
- Virgin launches credit card, cellular network
- Government approves Richards Bay smelter
- Eskom urges restructuring electrical
Distribution
End Summary.

China agrees in principle to textile export cap
-------------- --


2. (U) President Thabo Mbeki and Premier Wen Jiabaou
announced on June 21 that China would restrict its
textile exports to South Africa in order to preserve
a role for struggling domestic producers. Although
the details of the deal will be established by
negotiations over the next month, Beijing publicly
stated that it is willing to cap its exports at two-
thirds the current level through 2008. This agreement
will cover 31 categories of apparel and textiles,
with individual restrictions placed upon 100 specific
products. The short-term deal could allow South
African textile manufacturers time to address their
competitive weaknesses; however, the South African
industry has been in decline for the last 15 years,
with foreign competition representing only a portion
of its woes. According to clothing companies and
unions, South Africa lost 63,000 textile jobs over
the last three years. South Africa faces both high
unemployment (officially 27%, but 39% by a broader
measure including discouraged workers) and a major
current-account deficit. Sources: Business Day, June
19; Forbes, June 21; Business Report, June 22;
Financial Mail, IOL, June 23.

Government to speed up land reform
--------------


3. (U) The Department of Agriculture and Land Affairs
announced additional details on its plans to speed up
stalled land reform. On June 17, Minister Lulu
Xingwana pledged "drastic measures" to deal with
recalcitrant owners of under-utilized land, though
stressing that the government would take action
solely through legal means, such as eminent domain.
The Department declared that it plans to adopt an
area-based approach that will focus on specific
agricultural commodities demanded by the market and
seek to consolidate infrastructure for more efficient
local projects. In response, black and white farmers'
organizations reaffirmed their support for land
reform, provided that the government works with
landowners and offers the training and material
support necessary to improve the prospects for
recipients of land. At present, most of the farms
owned by beneficiaries of land reform fail have seen
sharp decreases in output. The government's goal
is for black farmers to own 30% of South African
farmland by 2014. Presently, 4% is black-owned.
Sources: SABC, June 17; Herald Eastern Cape,
June 18; Business Day, June 26 and 28; Reuters,
June 26.

Inflation growing, but within target range
--------------


4. (U) Due largely to more expensive petroleum and
food, CPIX (CPI adjusted for mortgage costs)
annualized inflation rates rose from 3.7% year-on-
year in April to 4.1 in May, in line with market

PRETORIA 00002730 002 OF 004


expectations. The increase confirms suspicions that
the South African Reserve Bank (SARB) will increase
interest rates as inflation continues to rise through
the rest of 2006. The SARB maintains an inflation
target range of 3-6%. In a troubling sign, however,
the producer price index (PPI) rose 5.9% year-on-year
in May from 5.5% in April. The PPI tends to lead
consumer prices by several months. Sources: Mail
and Guardian, June 29; Business Day, June 29-30.

Reserve Bank warns of future interest rate hikes
-------------- ---


5. (U) Tito Mboweni, South African Reserve Bank
(SARB) Governor, warned on June 22 that a widening
Current account deficit and unchecked consumer
spending would likely lead to an increase in interest
rates if the SARB is to keep inflation in check.
Though dismissing fears that the economy is
overheating and saying that "things generally look
good," he expressed concern that a spate of
conspicuous consumption indicated that borrowing
is too cheap. Data released by the SARB that day
showed that South Africa's current account deficit
in the first quarter of 2006 widened to 6.4% Of
GDP from 4.5% in the final quarter of 2005.
The rand fell significantly in the wake of the
announcement to R7.41/$, its lowest value in 29
months. Source: IOL, Mail and Guardian, June 23.

Standard and Poor's reaffirms SA long-term national
scale rating
-------------- --------------


6. (U) South Africa maintained its AAA long term
National scale ratings from Standard & Poor's,
Though the report expressed severe concern about
several of the country's "structural socioeconomic
weaknesses, including income disparities, poverty,
high unemployment, and the unfolding HIV/AIDS
pandemic." Standard & Poor's declared South Africa
to have an overall stable outlook, maintaining its
BBB+ long-term and A-2 short-term foreign currency
ratings and an A+ long-term and A-1 short-term
currency sovereign credit ratings. South Africa
earned commendation for its cautious fiscal policy,
continuing economic reforms, and expanding social
services. Definitions of all ratings are available
at www.standardandpoors.com. Source: iAfrica,
Standard & Poor's, June 19.

First quarter job growth slow
--------------


7. (U) Statistics SA reported on Tuesday that the
economy created 9000 formal non-agricultural jobs
in the first quarter of 2006. Despite strong economic
growth of 4.2% (annualized rate),seasonal job losses
in the wholesale and retail sectors prevented the
economy from making significant progress on
unemployment. Gross earnings by employees fell by
3.7%. While the modest employment rate increase
(0.1%) is certainly preferable to the 152,000 jobs
lost in the first quarter of 2005, it is still a
disappointing fall from the 90,000 jobs created in
the fourth quarter of 2005. South African labor
union Cosatu said in a statement that South Africa
needed to double employment growth if it is to meet
its goal of halving unemployment by 2014. Cosatu
pledged to intensify its efforts to make growth more
equitable through its Jobs and Poverty Campaign,
claiming that the statistics demonstrated a growth
strategy tailored for the elite. Source: Business
Day, Mail and Guardian, SouthAfrica.info, June 28.

Gauteng education budget may fall short of need
-------------- --


8. (U) The Wits University Education Policy Unit
Issued a warning on June 19 that the public education
budget for the Gauteng province, including both
Johannesburg and Pretoria, may be insufficient for
the challenges its schools face. Gauteng's population
is growing Steadily due to migration from other

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provinces, and its education system faces a severe
shortage of classroom space. Source: Business Day,
June 20.

Government expands healthcare subsidies
--------------


9. (U) The Department of Public Service and
Administration announced on June 22 that it will
increase subsidies for the Government Employees
Medical Scheme (Gems),which presently covers only
60% of the country's one million government employees.
The government will now pay 100% of insurance premiums
for employees earning less than R60,000/yr ($8225)
and 75% for all others, though it capped subsidies
at R1900 ($260) per month for each family and R500
($68) for individuals. Sapphire, the cheapest
insurance pack-age offered through Gems, costs R981
per month for the average South African family of
five. The offer will cost roughly R6 billion
($822.5 million) over the next three years, according
to government estimates. Sources: BuaNews, Business
Day, June 23.

Virgin launches credit card, cellular network
--------------


10. (U) In a blaze of publicity, Richard Branson's
Virgin Group launched two major brands in South
Africa this week: its Virgin Money financial services
and Virgin Mobile cellular network. Both divisions
pledge to lower prices for consumers by taking on
established, complacent industry players. Consumers
can anticipate falling prices in both fields, as
Virgin's dramatic market entry has already triggered
fee cuts from rivals trying to maintain their market
share. Rates for both credit cards and mobile phone
services in South Africa are among the highest in the
world, well above those in comparable markets. Virgin
Money, while not yet fully operational, will
ultimately offer customers the lowest credit card
rates in South Africa as well as offering short-term
insurance, investment services, and mortgages. Virgin
Money is in a joint venture with Absa, one of South
Africa's big four banks. Virgin Mobile SA, a R700
million ($97 million) joint project with minor market
player Cell C, will be the fourth brand in a market
dominated by Vodacom and MTN. Sources: MoneyWeb,
June 29; The Star, June 28; Financial Mail, June 30.

Government approves Richards Bay smelter
--------------


11. (U) The provincial government of KwaZulu-Natal
granted Tata Steel permission to begin work on its
proposed $87.5 million ferrochrome smelter in
Richards Bay, an industrial center on South Africa's
east coast, dismissing health and environmental
concerns raised by local NGOs. During the four years
of legal action, However, the government approved
several restrictions on the company designed to
safeguard the community. Construction will begin
within a month, according to the corporation.
Source: Pretoria News.

Eskom urges restructuring electrical distribution
-------------- --------------


12. (U) National electrical utility Eskom is calling
for reform of the nation's local electricity
distribution network, particularly in rural areas,
lest the country face power failures. Eskom is
embarking upon a major expansion of its generating
capacity, but fears that its investments in power
Plants and transmission lines are not being matched
by local authorities. It estimates that two-thirds of
municipalities under-fund electrical distribution.
To address the problem, Eskom proposed that the
government create seven regional electrical
distributors (REDs),six based out of South Africa's
major municipalities and the seventh to cover the
remainder of the country, including rural areas
lacking the resources to properly maintain their own
distribution networks. The Energy Intensive Users

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Group, an organization whose 25 members represent
40% of South African electrical consumption, issued
a statement in support of Eskom's proposal, citing
the need for reliable national power. South Africa's
electrical network suffered through the past year, as
a maintenance shutdown of one of its nuclear reactors
at Koeberg caused blackouts in the Western Cape.
Source: iAfrica, Energy Intensive Users Group,
June 22.

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