SOUTH AFRICA ECONOMIC NEWSLETTER JANUARY 27 2006

UNCLAS SECTION 01 OF 03 PRETORIA 000330 SIPDIS C O R R E C T E D COPY (ADDED SBU CAPTION/PORTION MARKINGS) SENSITIVE 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 JANUARY 27 2006 ISSUE ¶1. (U) 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: - December Consumer Prices Higher; - Producer Prices Up by 5.1%; - Consumer Survey Confirms Widening Income Gap; - South Africa's Official Unemployment at 26.7%; and - Treasury Proposes Reform of Local Taxes; End Summary. December Consumer Prices Higher -------------- ¶2. (U) Consumer prices (CPI) increased 3.6% in December, compared to November's growth of 3.4%. December's consumer prices excluding mortgage costs (CPIX) rose to 4%, from November's 3.7% increase. December's inflation came in slightly higher than market expectations of CPI and CPIX at 3.4% and 3.8%, respectively. For 2005 as a whole, the rates of inflation for CPI and CPIX reached 3.3% and 3.9%, respectively. Food inflation, at 4.3% compared to November's 2.4% increase, explained much of the increase in December's inflation, with prices of meat, vegetables, grains, fruits and fish showing healthy gains. Inflation in the state owned enterprises (telecommunications, electricity, and utilities) increased 7.8%, above the 4%-6% targeted range. Inflation for the poorest people rose 3.8% compared to 3.3% for the poor and middle income people and 3.6% for the richer people. By province, inflation was the highest in Northwest (4.9%) and Mpumalanga (4.6%) while least in Limpopo (2.6%) and KwaZulu-Natal (3.1%). Source: Statistics SA Release P0141.1; Standard Bank, CPI Alert and Investec CPIX Update, January 25. ¶3. (U) Comment. With oil prices above $60 per barrel (even with the rand's strength mitigating some of the oil price increase's impact) and high expected December consumer spending, most analysts expect the South African Reserve Bank to leave interest rates unchanged at its next meeting on February 2. Though not final, February's gasoline prices are expected to increase approximately R0.13 per liter compared to a decline of R0.30 in December. Table 1 gives annual consumer price inflation for the previous 3 years. Inflation 2003 2004 2005 CPI 5.8% 1.4% 3.3% CPIX 6.8% 4.3% 3.9% Core CPI 6.7% 4.6% 4.0% Note: Above Table lists consumer prices of metropolitan and other urban areas. End comment. Producer Prices Up by 5.1% -------------- ¶4. (U) December's producer price inflation accelerated to 5.1% from 4.5% in November primarily due to rising agricultural prices, although it came in below market expectations of 5.2%. On an annual basis, prices of domestically produced goods increased 4.6%, while imported goods increased 6.5%. On a month-to-month basis, prices of imported goods declined by 0.4% due to the strong rand. Producer price inflation has been rising steadily throughout 2005, starting at 1.4% in January. The main contributors to December's uptick in inflation were agricultural products, with December's y/y inflation at 9.9%, up from 5.5% in November, and mining and quarrying products at 26.1% in December compared to 23.8% in November. Source: PPI Alert and Statistics SA P0142.1, January 26. ¶5. (U) Comment. Since movements in producer prices foreshadow consumer prices, continued increases may lead to rising consumer prices. Rand strength, however, may mitigate a one-to-one relationship between increasing producer and consumer prices. Table 2 gives annual producer price inflation for the previous three years. Producer Inflation 2003 2004 2005 PPI 1.7% 0.6% 3.1% Domestic PPI 3.9% 2.3% 2.9% Imported PPI -4.2% -3.9% 3.6% PRETORIA 00000330 002 OF 003 End comment. Consumer Survey Confirms Widening Income Gap -------------- ¶6. (U) The University of South Africa's Bureau of Market Research released its latest Living Standards survey which showed a widening gap between the rich and poor. Only 800,000 South African households in the top Living Standards Measure (LSM 10) accounted for 30.5% of total household spending of R873 billion ($145.5 billion using 6 rand per dollar) in 2005. About 8% of 12.4 million households (967,000 households) spend less than R7,000 ($1,200) per year, accounting for 0.7% of total household expenditure. The middle class (LSM 6),accounting for 1.8 million households, spent R125.6 billion ($21 billion),or 14% of total expenditure. Poor households spent 71% of their budget on food compared to 24% and 28% by their middle class and rich households respectively. Income tax was the highest expenditure item at 17% for the rich households, followed by housing and electricity at 14%. South Africans spent R11 billion ($1.8 billion) on holidays in 2005, with the LSM 10 households responsible for 61% of that amount. The living standards survey excluded social grants and donations. Source: Reuters, Business Day, I-Net Bridge, January 24. South Africa's Official Unemployment at 26.7% -------------- ¶7. (U) South Africa's official unemployment rate in September 2005 remained stable at 26.7%, compared to 26.5% in March 2005 and 26.2% in September 2004 according to Statistics SA's Labor Force Survey (LFS). From January to September 2005, the number of created jobs increased by 658,000 jobs, with more than half generated between March and September. New entrants to the labor market accounted for the unchanged rate of official unemployment. The expanded unemployment rate (including people who have not looked for work over a four-week period) fell from 40.5% in March 2005 to 38.8% in September. Discouraged work seekers decreased by 512,000. It was the first time this decade that the number of discouraged work seekers declined, an indication of the extent to which a growing economy encourages people to enter the labor market. South African growth is expected at 5% in 2005, the highest in 21 years. Compared to September 2004, employment declined in the agriculture and manufacturing sectors; however, retail trade, finance, and construction showed the largest gains. Broken down by province, KwaZulu-Natal had the highest unemployment rate of 32.8%, followed by Free State (30.2%),Limpopo (30.1%),Eastern Cape (29.9%),North West (27.4%),Mpumalanga (26.9%),Northern Cape (24.7%), Gauteng (22.8%) and Western Cape (18.9%). By population group, the unemployment rate rose among all but white members of the labor market, where unemployment declined to 5.1% from 5.4% in September 2004. Source: Reuters, January 24; Business Day and Business Report, January 25. ¶8. (U) Comment. The LFS is a twice-yearly household survey, providing information about the level and pattern of unemployment, and the industrial and occupational structure of the economy. The LFS collects information from approximately 69,000 adults of working age (15 to 65 years) living in over 30,000 households nationwide. Stats SA staff interviewed these households, completing an LFS questionnaire, consisting of 120 questions. Besides detailed questions about work activities, information about the following areas is included: (1) demographic information (name, age, sex, population group); (2) biographical information (marital status, language, migration, education, training and literacy); (3) unemployment and non-economic activities; (4) job creation and expanded public works program activities; (5) agricultural activities and uncompensated activities; (6) migrant workers; and (7) household members running businesses. The LFS collects more household information than other information sources such as registrations recorded by the Unemployment Insurance Fund (UIF) or the Quarterly Employment Statistics (an employment survey of non-agricultural firms). Economists, such as T-Sec's economist Mike Schussler, have argued that Stats SA significantly underestimates employment by not using the UIF data. End comment. PRETORIA 00000330 003 OF 003 Treasury Proposes Reform of Local Taxes -------------- ¶9. (U) National Treasury proposed abolishing the regional services council (RSC) taxes and replacing them with an alternative system of taxes. According to National Treasury, the administration of the tax is difficult because municipalities do not have access to the books of tax payers, making effective enforcement hard. The RSC taxes are paid by businesses and employers to the metropolitan council in the region in which they operate. The RSC tax collected about R5.5 billion ($920 million) in the 2003-2004 financial year, or 9% of local government revenue. Removal of the RSC tax will mean a R24 billion ($4 billion) loss to tax collections over the next three years. In last year's budget speech, Finance Minister Trevor Manuel said the tax would end by June 30, 2006, whether or not alternatives are in place. Alternatives proposed by Treasury include a mix of grants, revenue sharing, and additional taxes. However, according to South African Chamber of Commerce (SACOB),the alternative taxes suggested by Treasury were not an improvement. Finance Minister Manuel is expected to make an announcement in February's national budget speech concerning which taxes will replace the RSC. National revenues of R7 billion ($1.2 billion) has been allocated this financial year to compensate local municipalities for any lost revenue. Source: Business Day, January 26. BOST