SOUTH AFRICA ECONOMIC NEWSLETTER

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E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
February 25 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 in the February 25
newsletter include:

- 2005 Budget aims to sustain faster growth
- Public sector capex to increase to 18 percent
- Social security grants increase for poor and disabled
- Tax relief for small businesses
- Leading economic indicator falls
- CPIX inflation hits record low
- 1.4 percent PPI raises hopes of interest rate cut
- AIDS increases South Africa deaths by 57 percent
END SUMMARY.

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2005 BUDGET AIMS TO SUSTAIN FASTER GROWTH
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2. Finance Minister Trevor Manuel unveiled a 2005 budget
aimed at sustaining faster economic growth while curbing
budget deficits. Gross domestic product (GDP) growth for
2005 was revised up to 4.3 percent from 3.9 percent
previously. The economy expanded by 3.7 percent in 2004 -
its fastest pace since 2000, when it grew by 4.3 percent.
Higher revenues from value-added and income taxes helped
boost government income more than R11 billion ($1.9 billion)
above previous estimates, allowing Manuel to cut the
corporate tax rate to 29 percent from 30 percent and hand
back R6.8 billion ($1.2 billion) in personal tax relief for
the 2005/06 fiscal year, beginning in April. The government
plans to spend R180 billion ($31 billion) on infrastructure
- ports, rail, power stations and dams - over the coming
five years. Growth was expected to average 3.8 percent in
2006, quickening to 4.4 percent in 2007. This growth
compares to predictions of 3.7 percent and 4.2 percent
respectively last October. The stronger economy helped
South Africa to sharply cut its budget deficit estimate for
fiscal 2004/05 to 2.3 percent of gross domestic product
(GDP),sharply below the 3.2 percent estimated in November's
medium term budget policy statement. The Treasury said
although the rand had taken a toll on the manufacturing and
mining sectors, it had also suppressed inflation pressures,
which meant the targeted CPIX measure was expected to remain
inside the 3 percent-6 percent band well into 2007.
(Reuters, February 24)

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PUBLIC SECTOR CAPEX TO INCREASE TO 18 PERCENT
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3. South Africa's public sector capital expenditure (capex)
is expected to grow at an average of 18.8 percent over the
year-year period covered by the 2005 Medium Term Expenditure
Framework (MTEF) up from an average of 11.7 percent a year
between 2001/02 and 2004/05, according to National
Treasury's Budget Review. Increased public spending of
R27.3 billion ($4.7 billion) will be for Municipal and
Provincial Infrastructure Grants to accelerate the
eradication of apartheid era backlogs in township roads,
water, sanitation, street lighting, community centers,
provincial roads, schools, and clinics, and to increase
employment through labor intensive construction methods via
the Expanded Public Works Program. An additional R5 billion
($862 million) will be provided to the housing budget and
Community Infrastructure and an extra R4.35 billion ($750
million) will be allocated for roads, rail, and
transportation upgrades for the 2010 World Cup. Other large
infrastructure budgets include R4.3 billion ($741 million)
for the hospital revitalization program, R3.3 billion ($569
million) for the national Public Works program, and R5.8
billion ($1 billion) for prison facilities, police stations,
and court facilities. Transnet, the state-owned transport
utility, plans to spend about R30 billion ($5.2 billion) on
ports, freight rolling stock, rail, and fuel pipelines.
Eskom's, the state-owned power utility, infrastructure plans
amount to R56 billion ($9.7 billion) and include investments
in power generation, transmission, and distribution. Total
capital expenditure by non-financial public enterprises is
estimated to be about R115 billion ($19.8 billion) over the
MTEF. (I-Net, February 24)

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SOCIAL SECURITY GRANTS INCREASE FOR POOR AND DISABLED
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4. Finance Minister Trevor Manuel announced social security
grant increases for the poor, disabled, and vulnerable
children. As of April this year, qualified individuals will
receive an additional R40 ($6.89) to their grants, totaling
R780 ($134.48) a month. Manuel said the foster care grant
would increase by R30 ($5.17) to R560 ($96.55) while the
child support grant has been increased to R180 ($31) a
month. Although the increases would have a major impact on
the income security of the most vulnerable, particularly in
support of children under the age of 14, Manuel also noted
that the expansion of the grants carried costs. "Of the R74
billion ($12.76 billion) in additional allocations over the
MTEF, a total of 30 percent is added to the social grant
programs, bringing aggregate social security spending to
R55.4 billion ($9.55 billion) next year and 12.7 percent of
consolidated spending by 2007/08," he explained. He added
the increase in social spending was due to the strength of
the economy and tax collection that had seen the treasury
projecting to raise R11 billion ($1.9 billion) more this
year than budgeted. (BuaNews, February 23)

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TAX RELIEF FOR SMALL BUSINESSES
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5. In a bid to stimulate the economy and create jobs by
developing small businesses, Government announced tax relief
of R1.4 billion for small companies, effective April 1.
Finance Minister Trevor Manuel said the new tax regime will
cover small business corporations (SBC),provided they
maintain at least four full-time employees for core
operations. To qualify as a SBC, Government has increased
the turnover limit for eligible companies from R5 million
($862k) to R6 million ($1.03 million). The tax relief means
that a SBC with a taxable income of R400,000 ($68,965) could
save from R32,500 ($5603) to R55,000 ($9483) in income tax.
The tax rate of small companies in other sectors including
close corporations will be reduced from 30 percent to 29
percent. The South African Revenue Services (SARS) will
also lend a hand to small businesses to be compliant of
their tax returns, by deploying "tax helpers" to areas where
small businesses are situated to help with tax registration,
returns and business tax obligations. SARS has dedicated a
help desk solely for small business inquiries about tax
compliance. (BuaNews, February 23)

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LEADING ECONOMIC INDICATOR FALLS
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6. South Africa's December 2004 leading economic indicator,
which is compiled by the South African Reserve Bank (SARB),
fell by 0.9 percent month-on-month (m/m),its steepest
monthly decline since May 2003. This decrease pushed the
year-on-year (y/y) increase down to 7.7 percent, its first
fall into single-digits since February 2004, from 10.8
percent in November. For the year as a whole, the leading
indicator rose by 10.6 percent in 2004 after a 7.0 percent
decline in 2003. Of the 13 components in December 2004,
only one - job advertisements - had a positive impact, four
were unavailable and eight were negative. The negative
factors were average manufacturing hours worked,
manufacturing orders, building plans approved, the interest
rate spread between the money market and capital market
instruments, equity prices, real M1 money supply, the
commodity price index and the leading indicator of major
developed countries. The unavailable data was for labor
productivity, business confidence, the inventory/sales ratio
and the gross operating surplus as a percentage of GDP. The
South African economy is currently in a record upturn, as
the current upturn started in September 1999. The previous
record upturn was from September 1961 to April 1965. (I-
Net, February 18)

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CPIX INFLATION HITS RECORD LOW
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7. The targeted CPIX inflation rate slowed to a record low
of 3.6 percent in the year to January as expected, versus
4.3 percent the previous month. Figures from Statistics
South Africa also showed the all-items consumer price index
(CPI) rose by an annual rate of 3 percent during the month
versus 3.4 percent in December. On a monthly basis, CPIX
rose 0.5 percent while CPI rose 0.3 percent. Both fell by
0.2 percent in December. It was the 17th straight month
that the CPIX measure - which strips out the impact of
volatile home loans - was inside the government's 3-6
percent target range. Moderating medical costs, a cut in
fuel prices and slowing food inflation were the main factors
behind the number. But the biggest long-term trend behind
subsiding inflation is the rand, which has chalked up three
straight years of huge gains against the dollar. Figures
from Statistics South Africa also showed the all-items
consumer price index (CPI) rose by an annual rate of 3
percent during the month versus 3.4 percent in December. On
a monthly basis, CPIX rose 0.5 percent while CPI rose 0.3
percent. Both fell by 0.2 percent in December. (Reuters,
February 25)

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1.4 PERCENT PPI RAISES HOPES OF INTEREST RATE CUT
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8. Producer price inflation slowed dramatically in the year
to January, coming in well below forecasts, sending bond
yields to their best ever levels and reinforcing market
expectations of an April rate cut. The producer price index
(PPI) rose by 1.4 percent in the year to January, better
than December's 1.9 percent rise and well below a consensus
forecast of a 2 percent rise. Statistics SA said sharply
slower increases on petroleum and coal were the main factors
behind the improvement. Expectations of a rate cut were
boosted on Wednesday when Stats SA said the targeted CPIX
consumer inflation measure had slowed to a record low of 3.6
percent. The bond market reacted by extending its rally,
with the yield on the key R153 ($26.38) bond strengthening
more than 8 basis points to a new best of 7.43 percent.
(Business Report, February 25)

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AIDS INCREASES SOUTH AFRICA DEATHS BY 57 PERCENT
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9. South Africa's death rate jumped 57 percent between 1997
and 2003 with HIV/AIDS emerging as one of the main causes of
death in the 15 to 49 age bracket, according to a study by
Statistics SA. Chief statistician Pali Lehohla said that
data from about three million death certificates issued
between 1997 and 2003 "provide indirect evidence that the
HIV epidemic in South Africa is raising the mortality levels
of prime aged adults in that associated diseases are on the
increase." According to the report, tuberculosis killed
37,917 people aged between 15 and 49 in 2001 while HIV/AIDS
claimed 7,564. Tuberculosis, influenza and pneumonia are
frequently opportunistic infections associated with
HIV/AIDS. South Africa has the highest HIV/AIDS caseload in
the world with 5.3 million people, or one in five adults,
living with HIV and AIDS, according to UN figures. The
British medical journal The Lancet this month cited
estimates from the South African Medical Research Council
showing that the number of deaths linked to HIV/AIDS was
likely to be three times as much as the one in the
government statistical report. The release of the latest
statistics on the causes of death came a week after
President Thabo Mbeki declared in his state of the nation
address that his government's plan to fight AIDS was "the
best in the world." (AFP, February 18)

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