SOUTH AFRICA ECONOMIC NEWSLETTER

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SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
March 18 2005 ISSUE



1. Summary. Each week, AMEmbassy 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:
- Major Revisions for ICT Charter?;
- Secondary Tax Stays;
- Vacant Land Prices Increase More Than Houses;
- Trade and Industry Encourages Co-ops;
- Business Confidence Remains High; and
- South African Household Debt Still Affordable;
End Summary.

MAJOR REVISIONS FOR ICT CHARTER?
--------------


2. Business Day reports that after two years of work
developing a black economic empowerment charter for the
information and communications technology (ICT) sector, a
new steering committee is drafting a replacement charter
for the sector. Problems arose because the original ICT
working group did not represent 70 percent of the sector,
including foreign-based multinationals, cellular
operators, broadcasting firm MultiChoice and state-owned
enterprises such as Telkom. The new charter may contain
some of the empowerment targets thrashed out in a final
draft issued last year by the working groups, but much of
the content is likely to be entirely new. The charter was
due to be implemented on March 1, but the final draft was
halted during talks with business, government and the
National Economic Development and Labor Council (NEDLAC),
when Telkom, the cellular operators and MultiChoice
refused to sign. Some of the original participants in the
working group are accusing the large corporations of
hijacking the process, while the corporations say the
initial process was misguided and unrepresentative. It
has also delayed the signing of empowerment deals, as
companies wait to see exactly what is required before they
bring in black partners. Analysts suggested that the
process was flawed because of the lack of early
involvement of large corporations, organized labor and
civil society. According to the article, a steering group
representing NEDLAC, telecommunications companies,
multinationals, government and the original ICT working
group is now drafting a new charter. Points of contention
include: (1) a dispute over how much equity black
investors must own in companies, including the
multinationals; (2) the composition of a body to oversee
the empowerment process and to score companies on their
efforts; and (3) whether broadcasting and
telecommunications companies governed by the Independent
Communications Authority of SA should abide by the
charter, or should follow the authority's stricter
empowerment rules. Source: Business Day, March 16.


3. Comment. Reaction to the Business Day article was
swift, with both Reuters and ITweb publishing refuting
accounts later on the same day as Business Day published
its article. Both refuting articles dispute having to
scrap the previous two years work on the charter and
assert that the charter is still expected to be final by
mid-2005. The Reuters article confirmed strongly the 30
percent ownership target, citing Joe Mjwara, the head of
the Information, Communication and Technology's steering
committee as its primary source. The ITweb article uses
other representatives from the steering committee that
confirm delays, but also expect that the charter will be
presented to Parliament on time. End comment.

SECONDARY TAX STAYS
--------------


4. Finance Minister Trevor Manuel reaffirmed his support
of the secondary tax on company dividends, saying it would
remain "as long as the African National Congress (ANC) is
in government." Calls for the tax removal, introduced to
encourage companies to retain income for investment, were
made by various business organizations during
parliamentary submissions on the 2005-06 budget proposals.
The Democratic Alliance (DA) also called for a phasing out
of the tax, saying that government should set a target
corporate tax rate of 25 percent over a specified time
period. In his budget speech last month Manuel announced
a cut of one percentage point in the corporate tax rate to
29 percent. The result of the lower corporate rate is
that the aggregate rate, including the secondary tax on
companies on a full-profit distribution, will be 36.89
percent compared to the previous rate of 37.78 percent.
Figures tabled in Parliament this week by Manuel showed
that the corporate income tax bill (excluding the
secondary tax) had risen from R15.6 billon in 1995-96 to
R60 billion in 2003-04. Source: Business Day, March 16.

VACANT LAND PRICES INCREASE MORE THAN HOUSES
--------------


5. The price of vacant land is growing faster than that
of houses in some areas, a trend that could make housing
within city limits unaffordable for many. A recent study
by property economists and assessors Rode & Associates on
Cape Town's Atlantic seaboard showed that the price of
serviced vacant land grew at a compound rate of 70 percent
a year between July 2001 and January 2005, while house
prices in the same area grew by 37 percent and Rode's
house price index for upper-priced homes in Cape Town grew
by 29 percent a year. Rode said he suspected that similar
trends were found in other metropolitan areas. Jacques du
Toit, a senior economist at ABSA bank, said indications
were that prices of vacant stands in major cities were
growing faster than prices of houses, saying that the
scarcity of serviced stands (lots of vacant land having
access to utilities) was becoming a structural rather than
a cyclical phenomenon. The property boom has resulted in
demand for land far outstripping supply, creating a sharp
upsurge in land prices. Combined with inefficiencies in
delivery of infrastructure, this has created a long lag
time for land to be subdivided and serviced. In addition,
other infrastructure constraints, such as traffic
congestion and the absence of an adequate public transport
system, as well as increasing urbanization, added to the
demand for residential properties in metropolitan areas.
Source: Business Report, March 16.

TRADE AND INDUSTRY ENCOURAGES CO-OPS
--------------


6. Trade and Industry Minister Mandisi Mpahlwa announced
the Department's plan to encourage the formation of co-
operatives as part of government's job creation strategy.
According to Department spokesman Bongani Lukhele, co-
operatives are small enterprises that differ from other
small enterprise since all participants are equal
shareholders. Co-operatives have historically been
popular in South Africa especially in the agricultural
sector. Lukhele cited stokvels (a savings group) as
another example of a co-operative where people join having
a common interest. The Department of Trade and Industry
established a Co-operatives Unit, looking to start
training in co-operative principles and practices, as
emphasized by the 2003 Growth and Development Summit.
Source: Sapa, March 16.

BUSINESS CONFIDENCE REMAINS HIGH
--------------


7. The latest University of Stellenbosch's Bureau of
Economic Research business confidence survey shows
business confidence high during the first quarter 2005 at
79, although below the 24-year peak level of 88 shown in
the last quarter of 2004. A value over 50 indicates
optimism while below 50 signifies pessimism about business
conditions. The survey contacts 3,000 respondents in the
retail, wholesale, motor trade, manufacturing, and
building and construction sectors of the economy. The
survey was conducted between February 16 and March 10,
soon after the South African Reserve Bank decided to leave
interest rates unchanged and during the period when gas
prices increased by 42 rand cents per liter. Business
confidence remained strong due to strong consumer demand;
although Rudolf Gouws, chief economist of Rand Merchant
Bank, suggests that the dip in confidence suggested a
slower increase in domestic expenditure in 2005. Source:
Business Day, March 17.

SOUTH AFRICAN HOUSEHOLD DEBT STILL AFFORDABLE
--------------


7. According to a Standard Bank study, South African
household debt is increasing, but consumers have been able
to finance increased debt through credit. Credit has been
available due to a combination of low interest rates and
rising disposable income. Debt as a proportion of
household disposable income was 55.4 percent in third
quarter 2004 compared to 51.4 percent one year earlier.
While South Africa's debt levels are increasing, they are
low when compared to levels in countries such as the
United Kingdom, Japan, and Canada, all of which have
household debt to income ratios of over 120 percent.
There is no universal threshold for the national debt to
income ratio at which household indebtedness becomes
unsustainable, although South Africa's low inflation and
interest rates suggest that its financing of its debt can
continue. Source: Business Report and Business Day,
March 17.

FRAZER