SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER FEBRUARY 9,

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SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER FEBRUARY 9,
2007 ISSUE

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1. (U) Summary. This is Volume 7, issue 06 of U.S. Embassy
Pretoria's South Africa Economic News weekly newsletter.

Topics of this week's newsletter are:
- Chinese President Arrives in South Africa
- Earnings Gap Widens on Skills Basis
- Car Sales Growth Slowing
- Average House Costs R811,000
- Reserves Increase Slightly
- South Africa Department of Public Enterprises Acknowledges
Energy Shortage
- South African Airways Cash Relief Talks
- SA Stands to Gain Billions of Rand from Carbon Trading
End Summary.


Chinese President Arrives in South Africa
--------------


2. (U) As part of his eight-nation, twelve-day African tour, Chinese
President Hu arrived in South Africa on February 6, where he talked
with President Mbeki about deepening the "New Strategic Partnership"
forged at the Beijing Focac Summit in November 2006. The two
countries signed agreements on economic cooperation and opening the
Chinese market to South African fruit exports. China also pledged
to assist with South Africa's Accelerated and Shared Growth
Initiative (ASGI-SA),the Joint Initiative on Priority Skills
Acquisition development program (JIPSA),and generating Chinese
foreign direct investment in South Africa. The countries also
intend to launch a joint Economic and Trade Cooperation website this
year. (Business Day, February 7. Pretoria News, February 7)

Earnings Gap Widens on Skills Basis
--------------


3. (U) The earnings gap between unskilled and skilled workers has
widened since the mid-1990s, but race and gender gaps in managers'
earnings have narrowed in recent years. This is according to new
research on income inequality released by the Human Sciences
Research Council's (HSRC's) Employment, Growth and Development
Initiative. Researchers found that earnings of low-skilled men and
women, adjusted for inflation, declined between 1995 and 2003, but
those of more highly skilled workers and managers did not change
much. In 1995-2003, unskilled men saw average real hourly earnings
fall from R9 to R5.90, with a particularly sharp decline for
unskilled black men. Real earnings of unskilled women fell from R8
to R5.10. However, the gap between the earnings of black and white
managers narrowed, as did the gap between male and female managers,
mainly as a result of employment equity policies and legislation.
Furthermore, the study found that large firms pay 10%-40% more than
small firms, depending on the skills category, and the earnings gap
is far narrower in the public sector than in the private sector.
(Business Day, January 5)

Car Sales Growth Slowing
--------------


4. (U) Figures released by the National Association of Automobile
Manufacturers of South Africa (NAAMSA) indicate that 52,213 vehicles
were sold in January 2007, an increase of 6.9% over January 2006
sales. Although higher than predicted by industry analysts, the
figure was much lower than the double-digit increases of recent
years. Industry players predict that vehicle sales growth will come
down in 2007 as consumers start facing-up to a tighter financial
environment. South Africans, already facing high personal debt,
experienced four interest rate hikes in 2006 and more hikes are
expected in 2007. The January sales growth came mostly from sales
of light and heavy commercial vehicles, which grew by 12.8% and
18.6%, respectively, as high levels of economic activity and
increased growth in spending on infrastructure drove sales in these
market segments. On the other hand, growth in car sales was a
marginal 4.5% higher than the number sold in the corresponding month
last year, despite the fact that January is traditionally a strong
sales month (35,819 units sold in January). NAAMSA expects the new
car market to grow more modestly this year at between 4% and 6%. SA
again fared well on the export front, with 8,556 units exported in
January, which is 7.9% higher than in January 2006. NAAMSA projects
exports to grow by 22% to 220,000 vehicles in 2007. (Fin 24,
January 5)

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Average House Costs R811, 000
--------------


5. (U) According to figures released by ABSA, South Africa's largest
bank, the average price of houses in the so-called middle segment
of the residential property market increased by 15.2% year-on-year
in 2006 (compared with a 22.7% increase in 2005) to about R811,000
($112,000) in nominal terms. Real house prices (adjusted for
inflation) increased by 10% in 2006, compared with a growth rate of
18.7% in 2005. ABSA expects nominal house price growth to be 9.1%
for 2007. From 2000 to 2006, the South African residential property
market experienced strong average price growth of about 20% a year
in nominal terms and around 14.5% a year in real terms.
Unfortunately, expansion of the country's road infrastructure has
not kept pace with mushrooming new residential developments, causing
higher levels of traffic congestion impacting negatively on
productivity and transport costs. (Fin 24, February 8)

Reserves Increase Slightly
--------------


6. (U) South African Reserve Bank (SARB) data showed that South
Africa's gross reserves were up 1% at $25.88 billion in January from
$25.61 billion in December. Net reserves, also known as the
international liquidity position, increased to $23.27 billion, up
from $22.98 billion in December. The moderate increase in reserves
was due to a weaker rand that limited the Reserve Bank's activity in
the market. The rand has, however, started to claw its way back,
which is expected to boost accumulation of reserves in coming
months, analysts said. (Business Day, January 8)

South Africa Department of Public Enterprises Acknowledges Energy
Shortage
--------------


7. (U) The Department of Public Enterprises (DPE) released a
confidential report on February 3 which paints a bleak picture for

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energy consumers, calling for better energy planning and predicting
future power shortages. The report, "Review of Security of Supply
in South Africa," recommends an overhaul to the energy planning
process which has largely been led by parastatal electricity
provider Eskom. In a separate press statement, DPE stated that the
responsibility for electricity supply security planning rests with
the Department of Minerals and Energy and that Eskom's role is to
help meet the demand for additional power generation. The report
acknowledges that the energy supply is very tight, as evidenced by
last month's rolling blackouts. At the time, DPE downplayed the
black-outs as a one-time event. Now, DPE has released a report
which paints a much bleaker picture. (Engineering News, February 6
and DPE Press Release, February 3)

South African Airways Cash Relief Talks
--------------


8. (U) Talks are under way with the Treasury to secure state support
for the further recapitalization of struggling national airline
South African Airways (SAA),which had experienced another "very
tough" financial year, Public Enterprises Minister Alec Erwin told
Parliament February 1. Erwin said that the airline needed
additional funds to strengthen its balance sheet and to expand its
fleet and route network. In October last year, South African
Airways started a low-budget airline, Mango, to compete with
Nationwide, 1Time and Kulula airlines. Mango sold thousands of
below-cost tickets, prompting a price war among the other airlines.
At the time, critics argued the government was subsidizing South
African Airways and Mango and predicted a government bailout.
Should the Treasury agree to the use of state funds for a
recapitalization, it would be the second capital injection received
by SAA in three years. The first was the R6 billion ($0.85 billion)
ploughed by Transnet into the organization early in 2004 to clear
its hedge book losses. The recapitalization would give SAA a boost
as it separates from former parent company Transnet and operates as
an independent state-owned enterprise reporting directly to
government. (Business Day, February 2)

SA Stands to Gain Billions of Rand from Carbon Trading
-------------- -


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9. (U) A survey conducted by the International Quality Productivity
Center (IQPC) has indicated that South Africa stands to gain up to
R5.8 billion ($0.8 billion) from carbon credit trading in the next
10 years. SA is reported to have a potential for millions of tons
carbon credits, while many coal power-based industries are
converting to clean energy. Under the United Nation's Kyoto
Protocol, which SA has ratified, developing and developed countries
are encouraged to exchange carbon credits for the purpose of
reducing global carbon emissions blamed for exacerbating global
warming. The Clean Development Mechanism (CDM) is the vehicle
employed for carbon trading and SA has launched six carbon trading
projects designed to reduce carbon emissions. According to the IQPC
survey, many countries have been slow to engage in the certified
emission reduction process. The study observed that some African
companies need to see tangible proof of profitability from the
carbon trading projects, while in the case of SA it found that some
local municipalities were uncertain about the implications on
projects under the Public Finance Management Act. Of the six
projects registered by SA companies, only the one implemented by the
state-funded PetroSA is fully operational. The project involves the
transforming of biogas to energy. The Department of Minerals and
Energy is the authority responsible for the rules and regulations
pertaining to carbon trading, while PriceWaterhouseCoopers oversees
the accreditation process in SA. (Business Day, January 15)

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