SOUTH AFRICA ECONOMIC NEWSLETTER MARCH 17 2006

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SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER MARCH 17 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:

- Are SA's Growth Prospects Faltering?;
- Energy Shortages will not Impact Higher Growth;
- South Africa's Entrepreneurship Ranking Falls;
- Value of BEE Transactions Decline but Numbers Increase;
- Importance of Informal Sector Underestimated; and
- South Africa Ranked 28th in Ease of Doing Business.
End Summary.

Are SA's Growth Prospects Faltering?
--------------


2. The national strike by Transnet workers, coupled with
intermittent power outages in South Africa's Western Cape,
might lead to a GDP growth rate below 3% in the first
quarter 2006, according to several economists. During the
last quarter of 2005, GDP grew by 3.3%; however, if the
Transnet strike is successful, ports, trains, commuter
railways and road freight operations, will be affected.
Metrorail, the Durban Container Terminal and the Richard's
Bay Terminal are expected to be the hardest hit. T-Sec
chief economist Mike Schussler said that a one-day
national strike by more than 60,000 Transnet employees
could cost the economy R100 million ($17 million, using 6
rands per dollar) or more. Standard Bank chief economist
Goolam Ballim said the cumulative effect of the strike,
along with Western Cape power cuts, could reduce GDP
growth by 0.5% in the first quarter in a worst-case
scenario. The South African Chamber of Business asserted
that February's two-day strike at the Durban Container
Terminal had cost the economy R110 million a day.
However, Chris Hart, a senior ABSA bank economist who
forecasts first quarter 2006 GDP growth at 3.5%-4.5%,
discounted large negative impacts of a Transnet strike.
Unions are worried that the disposal of Transnet's noncore
assets, excluding South African Airways, could cost about
30,000 jobs. Source: Business Day, March 13.

Energy Shortages will not Impact Higher Growth
-------------- -


3. In Parliament, Public Enterprises Minister Alec Erwin
denied that South Africa faces a national energy crisis,
asserting that tight reserve margins were the reasons for
the temporary power shortages. South Africa's margin of
reserve-generation capacity of 8%-10% was much lower than
the desired 15%, because higher than expected economic
growth had led to tightening reserves. Erwin denied that
investors were changing their minds about investing in
South Africa. The South African government had no
knowledge that according to press reports, a Russian
aluminum firm, SUAL, reversed its decision to invest in an
aluminum smelter because of electricity-supply shortages.
Erwin insisted government was negotiating with only one
investor, Alcan, about a smelter at Coega. Erwin
emphasized Eskom's plans to accelerate the spending of R84
billion ($14 billion) over the next five years on
maintenance, upgrading old plants and building new
capacity, and will spend an estimated $25 billion between
2010 and 2024 to almost double existing capacity. Eskom
CEO Thulani Gcabashe expected a short-term 300MW-400MW
shortfall during morning and evening peak hours in Western
Cape over the next several months. Gcabashe said Eskom
expected a peak demand of 35100MW nationally this year,
and had 36937MW of capacity. An abnormally cold winter
could add about 1000MW to peak demand. Source: Reuters,
March 14; Business Day, March 15.

South Africa's Entrepreneurship Ranking Falls
--------------


4. The 2006 Global Entrepreneurship Monitor (GEM) showed
that South Africa's entrepreneurship ranking had dropped
from 20th position out of 34 countries in 2004 to 25th
position out of 35 countries in 2005. GEM differentiates
between businesses that are started because people sense
an opportunity to earn more money, for lifestyle reasons,
or simply a business opportunity, and those businesses
that are started because people have no other option. The

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GEM report showed that less than 3% of businesses started
due to lack of options, such as those in the informal
sector, were likely to create a significant number of
jobs. In addition, more educated people were more likely
to start a business, sustain a business, and employ
people. In South Africa, tertiary educated adults create
employment 2.5 times more than those who only completed
secondary education, and 11 times greater than those who
had not completed secondary education. In other
developing countries, there isn't such a large difference
between secondary and tertiary education, so someone in
another developing country who has secondary education has
almost as much chance of being able to start a business
and employ people as someone with tertiary education. GEM
revealed that South African Indians and whites were more
likely to start a business than "coloureds" and black
South Africans. This is the fifth year that South Africa
has participated in the study, conducted by the University
of Cape Town (UCT) Center for Innovation and
Entrepreneurship at the UCT Graduate School of Business.
Source: Business Report and Business Day, March 13.

Value of BEE Transactions Decline but Numbers Increase
-------------- --------------


5. According to the BusinessMap Foundation Report,
announced black economic empowerment (BEE) transactions
amounted to R55 billion ($8.6 billion using 6.36 rands per
dollar, the 2005 average exchange rate) in 2005 compared
with BEE transactions worth R62 billion ($9.6 billion,
using 2004's average exchange rate of 6.45 rands per
dollar) in 2004. The number of announced BEE transactions
increased in 2005 to 350 from 250 in 2004. According to
BusinessMap, the top BEE deals by value for 2005 included
transactions of Old Mutual's R3.4 billion, Nedbank Group's
R3 billion, Transnet Retirement Funds Property Trust's
R1.4 billion, Growthpoint Properties' R1 billion, and
Nafcoc Investment Holding Company's agreement with Johnnic
Holdings, worth R675 million. Black ownership of
companies trading on the JSE remained at 7%, 18 percentage
points lower than the government's 2014 ownership target
of 25%. BusinessMap estimated that 10% of listed
companies were owned by BEE firms. However, given that
most of these companies were only 50% owned directly by
black individuals, this meant that there was direct black
ownership of listed companies of around 5%, with 7% of the
value of assets owned by blacks. If BEE activity included
the frequency of general business activity rather than by
number of financial transactions, then BusinessMap
estimated that more than 400 major BEE transactions took
place in 2005. These activities include contracts offered
to BEE companies, joint venture projects, mining
transactions where assets are sold rather than shares, as
well as exchanging share ownership. Source: Business Day
and Business Report, March 15.

Importance of Informal Sector Underestimated
--------------


6. According to the head of Statistics SA, Statistician-
General Pali Lehohla, GDP understates the contribution of
the informal sector, which could be as high as 10% rather
than 4%, according to current estimates. Measuring the
informal sector is difficult because those active in it
are not registered as taxpayers. The lack of accurate
data on the sector affects measurement of GDP and
unemployment, as being outside the formal sector does not
necessarily mean people are without employment. There are
an estimated 4 million people involved in the informal
sector, including about 800,000 domestic workers, and
about 7 million in formal sector employment. Lehohla said
the GDP growth figure for 2005 might be understated, and
could be revised upwards in November to take account of
new data. Current figures show the economy grew 4.9% in

2005. The 2004 growth rate was revised in November 2005
from 3.7% to 4.5%. In a separate statement to Parliament,
Lehohla expects that Statistics SA will not spend 7% of
its allocated budget in 2005/06 financial year, compared
to 30% of last year's budget not being spent. Source:
Business Day, March 16.

South Africa Ranked 28th in Ease of Doing Business
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7. According to World Bank's 2006 Doing Business report,
South Africa is ranked 28th out of 155 countries in
overall ease of doing business. The top rank went to New
Zealand and Democratic Republic of Congo attained the
155th position. Mauritius was the only other country in
Africa ranked higher than South Africa, coming in at 23
with Botswana being the next closest African country at

40. In order to rank overall ease of doing business, 8
categories were compared across the 155 countries. The 8
categories include: starting a business, licenses, hiring
and firing, registering properties, protecting investors,
paying taxes, trading across borders, and enforcing
contracts. South Africa received its highest score in
protecting investors (ranked 8th) and its lowest score in
paying taxes (ranked 84th). The next best South African
rank was in dealing with licenses and enforcing contracts,
at 37th and 38th, respectively. Source:
www.doingbusiness.org, March 16.

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