SOUTH AFRICA ECONOMIC NEWSLETTER JANUARY 27 2006

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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