Identifier
Created
Classification
Origin
06PRETORIA787
2006-02-24 11:05:00
UNCLASSIFIED
Embassy Pretoria
Cable title:  

SOUTH AFRICA ECONOMIC NEWSLETTER FEBRUARY 24 2006

Tags:  ECON EINV EFIN ETRD BEXP KTDB PGOV SF 
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E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER FEBRUARY 24 2006
ISSUE

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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 FEBRUARY 24 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:

- January Consumer Prices Continue Their Muted Rise;
- Producer Prices Increase 5.5%;
- Power Outages in Western Cape Province;
- Crisis Team to Manage Cape Power Outages;
- South Africa and United Arab Emirates Exchange Skills;
- Proposed Moratorium of Land Sales to Foreigners No
Problem to Investors; and
- Provincial Capital Spending Expected to Improve.
End Summary.

January Consumer Prices Continue Their Muted Rise
-------------- --------------


2. Consumer prices (CPI) and consumer prices excluding
mortgage costs (CPIX) increased 4% and 4.3% in January, in
line with market consensus forecasts of 4% and 4.4%,
respectively. January's inflation came in higher than
December's CPI and CPIX inflation of 3.6% and 4%,
respectively, primarily due to increasing food and medical
services prices. Core inflation, which excludes items
with volatile prices, such fuel and certain types of fresh
and frozen food, rose to 4.1% from 3.7% in December. With
CPIX inflation still below the midpoint of the South
African Reserve Bank's 3-6% target range, most analysts
expect no change in interest rates during 2006. In his
annual budget speech, Finance Minister Trevor Manuel
expected CPIX inflation to average 4.5% over the next
three years. It has remained inside its target range for
29 consecutive months. January typically shows higher
inflation because some components included in the consumer
price indices are surveyed annually rather than every
month. Specifically, annual surveys updated inflation for

housing (including rent) and medical care and health
expenses (including doctors' and hospital fees and
contributions to medical insurance). On a monthly basis,
price inflation of health care and food contributed 0.3
and 0.4 percentage points, respectively, to January's 0.7%
change. January's gasoline increase of 4 rand cents per
liter did not influence CPIX inflation much, although
February's 14 rand cent increase will put some pressure on
February's inflation. In addition, continued rand
strength will dampen imported price inflation, helping to
contain inflation. Source: Reuters, Standard Bank, CPI
Alert and Investec CPIX Update, February 22; Business Day,
February 23.


3. Comment. Over the last few years, prices of non-
tradable goods were the major sources of South African
inflation. Between 2003 and 2005, education, tobacco,
health expenses, household operations and transport costs
posted the highest inflation. Prices of clothing and
footwear, furniture and equipment along with recreation
and entertainment declined over the same period. Imports
are highest in these industries as competition from low-
cost countries and the strong rand contained imported
inflation. End comment.

Producer Prices Increase 5.5%
--------------


4. January producer prices increased by 5.5% (y/y) from
December's inflation of 5.1% lower than market
expectations of 5.9%. Higher inflation in petroleum
products and coal, basic metals, and agriculture and
processed food contributed to January's higher annual rate
of inflation. On a monthly basis, food prices declined,
due to lower fruit and vegetable prices. As a result of a
stronger trade-weighted rand, inflation in imported
producer goods in January subsided slightly while domestic
producer prices increased. In January, domestic and
imported producer prices increased 5.2% and 6.4% compared
to December's 4.6% and 6.5%, respectively. Source:
Standard Bank, PPI Alert; Investec, PPI Update, Statistics
SA Release P0142.1; February 23.

Power Outages in Western Cape Province
--------------


PRETORIA 00000787 002 OF 003



5. Large portions of the Western Cape experienced power
outages during February 19 and 20, with continuing
intermittent power cuts expected throughout the week in
order to avert wide-scale blackouts. During the weekend,
power outages affected mostly residential users, although
commercial and industrial consumers faced outages on
February 22. Eskom has advised that Cape Town will have
to do without 500 megawatts (mW) of its normal weekday
consumption of 2600mW, according to Saleem Mowzer, chief
executive of the Regional Electricity Distributor. Mowzer
said power cuts would continue until the weekend of
February 25-26, with the situation normalizing once the
Koeberg nuclear power station was working optimally. The
Western Cape region is dependent on Koeberg and overland
power transmission lines for electricity supply. Analysts
attribute erratic electricity supply to years of
underinvestment on ageing infrastructure that cannot
provide enough power to a growing economy. Eskom
announced plans to pour R93 billion ($15.5 billion, using
6 rands per dollar) into creating new capacity over five
years, including restarting mothballed coal plants and
building gas-fired facilities and a pebble bed nuclear
reactor. About 90% of South Africa's power comes from
coal, and 6% from Koeberg, Africa's only nuclear facility.
Eskom will increase electricity prices in 2006 by 5.1%,
followed by 5.9% and 6.2% in 2007 and 2008, respectively,
all above expected inflation rates. Source: SAPA,
Business Report, Business Day, and Reuters, February 22.

Crisis Team to Manage Cape Power Outages
--------------


6. A crisis committee will manage rolling blackouts in
the Western Cape Province as power cuts affect commercial
and industrial users as well as residential consumers.
Consisting of Eskom, the Cape Town City Council, the
Regional Electricity Distributor One (Red One) and the
provincial government, the committee will try to minimize
adverse economic effects of the rolling blackouts. Eskom
announced the power cuts would last an extra two days past
its previous assurance that full power would be restored
by February 21. Eskom CEO Thulani Gcabashe said the power
cuts were being extended because work to get Koeberg's
nuclear plant up and running had taken longer than
expected. Saleem Mowzer, head of newly created Red One
said the distributor would be spending R180 million ($30
million) in 2006 on improving infrastructure. Source:
Business Day, February 23.

South Africa and United Arab Emirates Exchange Skills
-------------- --------------


7. As part of the Accelerated and Shared Growth
Initiative, the South African government announced a
placement and exchange program with the United Arab
Emirates (UAE). The program will choose 100 women to work
for companies in the UAE to develop their skills. The
women would work in the construction, banking and
hospitality industries. Primarily, recently graduated
unemployed professionals, experienced women contractors
and business owners will be recruited for exchange. The
government cites shortages of skills as a major constraint
to creating more jobs and increasing the long term growth
to 6%. Source: Business Day, February 23.

Proposed Moratorium of Land Sales to Foreigners No Problem
to Investors
-------------- --------------


8. Shadrack Gutto, the chairman of the government-
established panel of Experts on Foreign Ownership of Land,
asserted that the panel's proposed recommendation of a
moratorium on land sales to foreigners would not impact
foreign investors. He cited studies from Chile, Brazil,
and Canada showing that controls on foreign land ownership
did not affect investor confidence as evidence of
investor's unconcern in domestic land sales procedures.
According to Gutto, foreigners sell after several years,
while investors are interested in security of tenure. The
panel recommended a halt in land sales to foreigners as an
interim measure until the Department of Agriculture and
Land Affairs formulated new legislation. It also
recommended new disclosure requirements applicable to both
corporations and individuals owning land. Individuals

PRETORIA 00000787 003 OF 003


would be required to disclose gender, nationality, and
citizenship. Gutto states that the panel is still
considering whether disclosure of race will be required.
Agriculture and Land Affairs Minister Thoko Didiza should
receive the panel's final report either in April or May

2006. The Cabinet will have to accept the panel's
recommendations before implementation. Source: Business
Day, February 23.

Provincial Capital Spending Expected to Improve
-------------- --


9. Finance Minister Trevor Manuel expects provincial
under spending on capital projects to reach R800 million
($133 million) during the current fiscal year. During the
2004/05 fiscal year, provincial governments failed to
spend nearly R2 billion ($314 million at R6.36 per dollar,
the average 2005 exchange rate) of their R12 billion ($1.9
billion) total capital budget. Manuel noted that R1.2
billion more had been spent on capital projects compared
to the previous fiscal year. He cited improved
communication between the Departments of Education, Health
and Public Works as key to increasing provincial capital
spending. The Division of Revenue Bill, determining the
split of funding between national, provincial and local
governments provides for 51% national share (R215 billion
or $35.8 billion of the R418.2 billion capital budget for
2006/07),42% going to the provinces (R176.7 billion, or
$29.5 billion) and 6% (26.5 billion, or $4.4 billion)
allocated to municipalities. Critics pointed to third
quarter 2005 figures showing that provinces spent only 55%
of their capital budget, as indications that provinces may
not be able to fully utilize this fiscal year's capital
budgets as much as Manuel expects. Source: Business Day,
February 20.

TEITELBAUM