Identifier
Created
Classification
Origin
06PRETORIA1196
2006-03-24 11:18:00
UNCLASSIFIED
Embassy Pretoria
Cable title:  

SOUTH AFRICA ECONOMIC NEWSLETTER MARCH 24 2006

Tags:  ECON EINV EFIN ETRD BEXP KTDB PGOV SF 
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FM AMEMBASSY PRETORIA
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INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
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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 MARCH 24 2006
ISSUE


UNCLAS SECTION 01 OF 03 PRETORIA 001196

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 MARCH 24 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:

- Construction, Property BEE Charters Signed;
- BER Expects 2006 Growth at 4.6%;
- SA Firms See Expansion in Carbon Credits;
- Firms that Use Import Parity Pricing may Lose Tax Benefits;
- Services Key to Banks' BEE Procurement;
- Schools Lack Computer Equipment and Literacy; and
- China's Influence on Rand to Grow.
End Summary.

Construction, Property BEE Charters Signed
--------------


2. The construction and property black economic
empowerment (BEE) charters were signed after about two
years of negotiations. Both charters proposed a range of
targets, including the sale of 25% of assets of the sector
to black partners within the next five years. The
charters committed private corporations to set aside 10%
of their annual development investments to underdeveloped
areas and to achieve 40% black representation at board
level, half of them women. The construction charter also
proposed a target of 70% for procurement. The property
charter allows different treatment for sub-sectors, such
as estate agents, commercial property owners, property
services companies and property loan stock companies.
Source: Business Report, March 20.

BER Expects 2006 Growth at 4.6%
--------------


3. Stellenbosch University's Bureau of Economic Research
(BER) expects South African growth to reach 4.6%, with
lower inflation and higher infrastructure spending. BER's
prediction was lower than the government's 5% growth
forecast. BER also expects 2007 growth slowing to 4.1%.
BER views robust increases in real disposable income as

the main reason for consumer-led growth. According to
BER, as long as skills shortages are reduced, the economy
had a potential to create more jobs, leading to growth in
real income. BER warned that growth could be slowed by a
drop in prices for commodities other than gold. Business
confidence recovered in the first quarter 2006. The
business confidence index rose to 86 from 85 in the
previous three months, according to a survey by Rand
Merchant Bank and BER. The index reached a 24-year high
of 87.6 in the fourth quarter of 2004. BER predicted that
the rand would average R6.35 a dollar in 2006 and R6.92 in
2007, while the currency was expected to be R7.79 against
the euro and R8.66 in 2006 and 2007, respectively.
Source: Business Report, March 20.

SA Firms See Expansion in Carbon Credits
--------------


4. According to Pricewaterhouse Coopers (PwC),South
African companies could earn R5.8 billion ($950 million,
using 6.1 rands per dollar) over the next 10 years from
the sale of carbon credits earned on projects to reduce
greenhouse gas emissions. Previous estimates of the
economic benefits reached R2.5 billion. The R5.8 billion
projection applies to six South African projects that have
either been approved or are in the final stages of
approval by the executive board of the Clean Development
Mechanism (CDM),a global system that allows trade in
reductions of carbon emissions by signatories to the UN's
Kyoto Protocol. Harmke Immink, a manager in the
sustainability solutions division at PwC, said the
estimate was based on an exchange rate of R10 to the euro
and a price of E8 per ton of certified emission
reductions. The R5.8 billion excludes the potential
income accruing to several other projects that are still
undergoing CDM approval, 13 of which have already been
registered. PwC's South African office has applied to
audit the projects that have applied for CDM status by
ensuring the projects meet the requirements of the Kyoto
Protocol and verifying that they are actually cutting
emissions. Source: Business Report, March 20.


PRETORIA 00001196 002 OF 003


Firms that Use Import Parity Pricing may Lose Tax Benefits
-------------- --------------


5. According to officials at the Department of Trade and
Industry (DTI),government is considering withholding
incentives from companies that charge customers import
parity prices. Government leaders, notably President
Thabo Mbeki and Trade and Industry Minister Mandisi
Mpahlwa, have spoken out against the continued use of the
controversial pricing mechanism, under which major local
manufacturers charge customers the price it would cost to
import the product. State benefits that could be
reconsidered include programs such as government's
Strategic Industrial Projects (SIP) incentive initiative,
which offers tax breaks to companies investing at least
R50 million in qualifying projects. Nimrod Zalk, the
Chief Direction of DTI's competitiveness unit, said the
decision would apply to future incentives and not
retroactively. Mittal Steel SA spokesman Thami Didiza
said the company no longer applied the import parity
pricing mechanism, as prices were benchmarked on those of
comparable markets. Source: Business Day, March 22.

Services Key to Banks' BEE Procurement
--------------


6. Despite South Africa's major banks increasing their
spending on procurement from black economic empowerment
(BEE) entities, BEE firms provide mainly stationery,
cleaning and security services. Standard Bank, the
largest bank by assets, spent R1.75 billion ($290 million)
on procuring goods and services from BEE companies in
2005, representing 38% of its total procurement spending.
First National Bank (FNB) spent 45% on BEE suppliers in
the past year. To ensure participation by different
players, FNB was using a rotation system, where shorter
contracts were given to BEE parties to allow more to
become involved. The financial sector charter has set
procurement targets at 50% and 70% by 2008 and 2014,
respectively. Drawbacks to increasing BEE small firm
participation include capacity constraints, no economies
of scale in information technology and inability to
provide support services on a national scale. Nedbank
wants to achieve at least 20% of its BEE procurement
expenditure in high value services. The bank spent 34.5%
of its procurement budget on BEE firms in 2005. (Business
Report, March 22)

Schools Lack Computer Equipment and Literacy
--------------


7. Education Department statistics show that by the end
2005, 28% of South African schools used computers for
teaching, even though 58% of schools had computers. The
58%, however, does include computers used exclusively for
administrative purposes. Provincial statistics are stark
in comparison to one another. While 14.2% of Eastern
Cape's schools have computers, only 4.5% use them for
teaching; 99.4% of Western Cape's schools have computers
with 61.8% using them for teaching. In some provinces up
to 60% of schools do not have access to electricity, and
other infrastructure issues such as adequate roads and
buildings also need to be provided. Students in the 72%
of schools where computers are not used for teaching are
using the education department's new curriculum which, in
some parts, assumes the 12-million or so pupils at South
Africa's public schools have access to computer
technology. Government's white paper on education,
published in 2003, promised that every South African
school pupil will be information and communications
technology-literate by 2013. The Education Department's
heads of education committee emphasized teacher training
in computer-based education for 2007. There is
substantial business investment in providing schools with
computers, and teachers with training. Parthy Chetty,
South African education manager for Intel, points to
Intel's investment of R9 million ($1.5 million) on
training 30,000 out of South Africa's 400,000 teachers in
computer technology since 2003. According to Chetty,
Intel has found there is often a gap between training and
teachers using what they have learnt because their access
to computer laboratories is limited. A minimum of five
teachers in each school has to be trained so that a viable
support system exists. The Education Department plans to

PRETORIA 00001196 003 OF 003


issue a bid to audit the information technology
infrastructure available in South African schools in the
next few months. This audit is separate from one being
conducted countrywide about school resources and the
schools register of needs, which aims to give a clear
picture of exactly what is needed to equip all state-
funded schools. The first audit began in September 2005
by examining school needs of water, electricity,
classrooms, libraries, laboratories and sports facilities
and should be completed by March 2007. Source: Business
Day, March 22; IOL, March 23.

China's Influence on Rand to Grow
--------------


8. According to James Robertson, Standard Chartered
Bank's Head of Global Markets, China will have a greater
impact on the value of the rand in the future because of
rapidly shrinking trade with South Africa's traditional
trading partners. South Africa's trade with China is
growing 26% annually compared with a decline of 26% in
trade between South Africa and the U.S. and 4% decline
between South Africa and the United Kingdom. He also
noted that the current composition of the trade weighted
rand basket was still primarily made up of the euro
(36.4%),U.S. dollar (15.5%),UK pound (15.4%),the
Japanese yen (10.4%) and 22.5% in other currencies.
Robertson suggested that the South African Reserve Bank
(SARB) could add the Chinese yuan into the trade weighted
rand calculation, even though the yuan is now in a managed
float, pinned to the U.S. dollar. Robertson expects the
yuan to become a larger portion of the rand calculation,
especially if it is allowed to float. Higher commodity
prices will also support the rand's strength, despite the
possible secondary inflation effects of higher oil prices.
South Africa's exports to China have increased four-fold
in the first nine months of 2005 to R22 billion from only
R5 billion in the first nine months of 2004. Source: I-
Net Bridge March 23.

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