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Cablegate: South Africa Economic Newsletter

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RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #4520/01 3141425
ZNR UUUUU ZZH
R 101425Z NOV 05
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 9969
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 PRETORIA 004520

SIPDIS

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
November 10 2005 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:

- Reserve Bank Highlights Inflation Concerns;
- October Net Reserves Reveal Small Increase;
- British Foreign Investment in SA Increases;
- Electricity Distribution Planned Reorganization Changes;
- SA Highest in Antidumping Complaints;
- Provinces Spend 40% of Capital Budget;
- New Employment Study Shows Large Increase in Jobs;
- Financial Sector Contributed to BEE Ownership; and
- Telkom Begins to Charge Based on Internet Usage.
End Summary.

RESERVE BANK HIGHLIGHTS INFLATION CONCERNS
------------------------------------------

2. At its semi-annual Monetary Policy Forum, South
African Reserve Bank (SARB) Governor Tito Mboweni
emphasized the deterioration in inflationary expectations
over the past several months and reiterated SARB's
intentions to be ahead of the curve in dampening increased
inflation. He cited higher oil prices as the primary
inflationary risk and viewed that second-round inflation
had not yet materialized. However, if a further
deterioration in inflationary expectations happens, then
SARB would not hesitate to take appropriate action to
ensure inflation stayed within its 3%-6% range. SARB now
expects CPIX inflation (consumer inflation excluding
interest costs on mortgages) to reach 5.8% in the second
quarter of 2006, easing to 5.3% by the end of 2007. CPIX
has remained inside its target range for 25 consecutive
months. Strong economic growth was expected to continue
for the remainder 2005, although high oil prices and
softer global growth posed substantial risks. Strong
domestic spending has spurred GDP growth to 4.8% in the
second quarter 2005 from 3.5% in the first. Growth is
expected to average above 4% for 2005, up from 2004's
growth of 3.7%. Source: Business Day and Business
Report, November 9.

3. Comment. First-round effects of high oil prices refer
to the direct effect on inflation of higher fuel prices,
while second-round effects refer to additional costs being
passed on to consumers by producers and retailers that
push inflation even higher. Since the last Monetary
Policy Committee (MPC) meeting in October, SARB Governor
Mboweni has repeatedly spoken about increased prospects of
higher interest rates if inflationary expectations
continue to rise. If oil prices continue to rise, many
expect that the next movement in interest rates will be
up. The next MPC meeting will start December 7. End
comment.

OCTOBER NET RESERVES REVEAL SMALL INCREASE
------------------------------------------

4. South Africa's net reserves rose modestly in October
to $16.22 billion from $16.06 billion at the end of
September, according to the South African Reserve Bank
(SARB). Gross reserves increased to $19.69 billion at the
end of October from $19.53 billion in September. The
rand, which weakened about 5 percent in October, did not
change in reaction to the release of the foreign reserve
data. In the future, net reserves could increase because
of Vodafone's intentions to increase its investment in
Vodacom to 50%, the second largest foreign direct
investment deal in South Africa. Source: Reuters,
November 7.

BRITISH FOREIGN INVESTMENT IN SA INCREASES
------------------------------------------

5. British-based cellular group Vodaphone wants to
increase its share of Vodacom, a South African cellular
company, to 50% from 35% at a cost of R16 billion ($2.5
billion, using 6.5 rands per dollar). This is the second
largest foreign direct investment (FDI) in South Africa
after Barclays R28 billion ($4.3 billion) investment in
ABSA. South Africa's balance of payments surplus has
continued to rise in the third quarter 2005, despite a

PRETORIA 00004520 002 OF 003


continuing deficit on goods and services. The expected
improvement in FDI should help South Africa finance its
current account deficit, which could reach 3.7% by the end
of 2005. Analysts expect that the Vodaphone foreign
investment is the beginning of large increases of much
needed foreign investment in South Africa, as the country
begins to invest in its own infrastructure. Rand Merchant
Bank Asset Management Chief Investment Officer, Charles
Booth, predicts that more foreign firms will target South
African assets, citing financial services,
telecommunications and construction sectors as possible
targets. Source: Business Day, November 4, 7, and 9.

ELECTRICITY DISTRIBUTION PLANNED REORGANIZATION CHANGES
--------------------------------------------- ----------

6. The Department of Minerals and Energy (DME) announced
that it may increase the number of regional electricity
distributors (RED) from six to seven, to provide
additional incentives for smaller municipalities to join
the planned regional distribution system. The proposed
seventh RED would consist of smaller municipalities that
refuse to join the other six. The original six REDs
contained one large metropolitan area, and participation
in the REDs is voluntary, so some smaller municipalities
have refused to participate in the restructuring process.
Initially, government planned to merge Eskom's (the state-
owned electricity utility) seven distribution business
units and those of the 187 licensed municipal distributors
to form six REDs, aiming to simplify the current 2,000
tariff rates that exist between the licensed municipal
electricity distributors and Eskom. Fierce opposition
from smaller municipalities resulted because these
municipalities have used the profits from electricity
provision to subsidize other services. DME had proposed
that the profits and dividends earned by REDs would be
shared in proportion to the assets contributed by all
participants. DME also wants participation in REDs to be
mandatory, noting that the Cabinet had approved the
Electricity Distribution Industry Restructuring Bill,
mandating municipal participation, that is now awaiting
Parliamentary approval. Details regarding DME's plans on
how to compensate Eskom and municipalities for their
assets transferred to REDs would be presented to
Parliament in March 2006. Source: Business Day, November
4.

SA HIGHEST IN ANTIDUMPING COMPLAINTS
------------------------------------

7. In the first six months of 2005, South Africa has
initiated the highest number of antidumping investigations
in the world, according to the World Trade Organization.
South Africa has begun 17 investigations, more than 3
times the number of cases started in 2004. The products
that were more frequently cited were in the plastics
sector, followed by chemicals and base metals. The
increasing trend in antidumping cases in South Africa was
not mirrored in the declining global trend. Europe
initiated the second largest number of antidumping cases
(15), with China being the most frequent subject. Source:
Business Day, November 4.

PROVINCES SPEND 40% OF CAPITAL BUDGET
-------------------------------------

8. According to the Mid-Term Provincial Budget Report,
the nine provinces spent 40% of the R11.9 billion ($1.8
billion, using 6.5 rands per dollar) combined capital
budget by the midpoint of the fiscal year at the end of
September. For fiscal year 2004, the provinces failed to
spend nearly R2 billion ($310 million) of their R12
billion capital budget. Limpopo Province spent the least
amount of its capital budget, at 28.8% while Mpumalanga
and Gauteng provinces spent the highest amount, at 52.4%
and 48.9%, respectively. Capital spending on education
was at the lowest percentage, 34.1% for the first six
months of 2005, with public works, roads and transport
showing the highest percentage of capital spending at
50.7% of the R4.3 billion budget. Source: Business Day,
November 3.

NEW EMPLOYMENT STUDY SHOWS LARGE INCREASE IN JOBS
--------------------------------------------- ----

PRETORIA 00004520 003 OF 003

9. The South African Employment Report showed that 1,000
new jobs per day were created in South Africa, enough to
absorb all new entrants into the labor market. The study
used records of the Unemployment Insurance Fund (UIF) to
calculate new fund participants. The data from UIF is not
used by Statistics SA to calculate official unemployment.
Mike Schussler, T-Sec chief economist in charge of the
report commissioned by trade union UASA, cited monthly UIF
new registered employees in commercial establishments at
30,000, enough to employ 360,000 new entrants to the labor
market every year. UIF's commercial establishment
category does not include domestic workers, public sector
employees, the self-employed, or those only working for a
commission, implying that the actual job increases may be
more. Source: Business Day, November 3.

FINANCIAL SECTOR CONTRIBUTED TO BEE OWNERSHIP
---------------------------------------------

10. Of all banking and insurance company equity sales to
black investors since 1996, over half were finalized since
the conclusion of the Financial Sector Charter (FSC) in
October 2003. Black investors purchased R30 billion ($4.6
billion) over the past 18 months of the cumulative R50
billion ($7.7 billion) in stock sales since 1996,
according to BusinessMap Foundation Director Colin Reddy.
With the market capitalization of the financial sector on
the Johannesburg Securities Exchange at R694 billion ($107
billion), the R50 billion amounted to 7% of the sector's
equity transferred to black companies. The FSC called for
10 percent direct black ownership. In 2004, black
investors concluded 49 transactions worth R20 billion, and
by end of September 2005, 52 deals worth R12 billion were
concluded. Nationally, Black Economic Empowerment (BEE)
transactions increased by 29% in 2004 and were worth R52.9
billion ($8.1 billion), according to auditing firm Ernst &
Young. Philip Hourquebie, the Chief Executive of Ernst &
Young, said BEE had become a key driver of merger and
acquisition growth in South Africa. According to
BusinessMap research, the banking sector employed various
strategies to improve black ownership. ABSA used an
option structure, Standard Bank used a large employee
scheme, FirstRand opted to sell to community trusts and
Nedbank included its clients. Source: Business Day,
November 7.

TELKOM BEGINS TO CHARGE BASED ON INTERNET USAGE
--------------------------------------------- --

11. On November 1, Telkom introduced a new billing system
based on per gigabyte usage and capping of local services.
Monthly charges for a 30-gig account will increase to
approximately R2,000 ($308) compared to current charges of
R200 to R600. While this new billing system may benefit
infrequent users, many small and medium enterprises (SMEs)
and home users will find the new charges much more
expensive. Many Internet Service Providers have started a
petition to try to fight the proposed new billing scheme.
The complaints range from the more frequent ADSL
(asymmetric digital subscriber line) reset times to
concerns about losses due to overusage when close to the
cap amount. SMEs that are reliant on local Virtual
Private Networks (VPN) as well as the companies offering
these services will suffer the most. Larger companies
will move their websites to international hosts where the
cost can be up to 20 times cheaper than in South Africa.
Source: The Mercury, November 7.

HARTLEY

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