SOUTH AFRICA ECONOMIC NEWSLETTER APRIL 7 2006

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SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER APRIL 7 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:

- SA's Inflation Shows Signs of Growth Although Should
Remain Within Targets;
- Manufacturing Sector Shows Signs of Fragile Recovery;
- Higher Corporate Tax Collection Reduces Federal Deficit Even
Further;
- NAAMSA Reports March Vehicle Sales Still Strong;
- Business Confidence Improves Slightly in March;
- Survey Shows 2005 South African FDI Higher than India's;
- House Price Inflation Moderates;
- January Retail Sales Slow; and
- Clarification on Synthetic Fuel Tax and Mine Royalties.
End Summary.

SA's Inflation Shows Signs of Growth Although Should
Remain Within Targets
-------------- --------------


2. South African inflation is trending higher, although
it should remain within the South African Reserve Bank's
(SARB) target band of 3%-6%. SARB's main challenge, apart
from external factors such as the oil price, is credit
growth, which shows no signs of abating, and is slowly
becoming more of a threat to inflation. Credit growth
increased 21.5% y/y in February compared to January's
20.6% growth, driven higher by strong demand for mortgage
advances. Money supply (M3) increased 21% in February,
compared to January's increase of 19.7%. SARB Governor
Tito Mboweni commented that interest rates would probably
not be reduced when the monetary policy committee meets
later in April. Source: Business Day, April 3.

Manufacturing Sector Shows Signs of Fragile Recovery
-------------- --------------


3. Investec's Purchasing Managers Index (PMI),a measure
of manufacturing activity, rose to 51.5 in March from 49
in February, slightly above the 50 breakeven value
indicating that half of the respondents expect improvement
in business activity and half do not. According to Andre
Roux of Investec Asset Management, the slight depreciation
of the rand during March improved both the export
performance of manufacturers as well as the degree of
import competition. Most of the sub-components of the PMI
contributed to the rise in March, with the seasonally
adjusted business activity index gaining by 7 index points
to 54.9. New sales orders improved to 53.3 from 49 in
February. The employment index rose to 48.2 from 45.8 in
February, although most survey respondents still expect no
overall increase in manufacturing jobs. Managers'
purchasing commitments improved further, with the index
climbing to 54 from 48.9 in February, which indicated that
managers were buying into the improved conditions within
the sector. However, short-term (6-month) expectations
regarding general business conditions deteriorated during
March, with the expectations index decreasing from 71.4 in
February to 68.4. Source: Reuters, April 3; Business
Day, April 4.

Higher Corporate Tax Collection Reduces Federal Deficit
Even Further
-------------- --------------


4. South Africa collected more than R1 billion more than
the February 2006 estimate of R417 billion ($70 billion,
using 6 rands per dollar) due to higher than expected
corporate tax collections through the end of its fiscal
year 2005/06. As of the March 31 end of the financial
year, the South African budget deficit was 0.3% of GDP,
closer to a balanced budget than February's estimate of
0.5%. In February 2005, the National Treasury estimated
that tax collections would be R372.8 billion, R45.3
billion lower than the actual amount collected. Personal
income tax collections were R125.4 billion below
February's 2006's estimate of R126.5 billion. However,
according to the South African Reserve Bank's latest
quarterly bulletin, compensation of employees slowed in
2005 to 8.9% from 9.4% in 2004. Manuel said that the
initial target of R372.8 billion was based on a set of

PRETORIA 00001414 002 OF 003


macroeconomic assumptions that improved over 2005.
Source: Business Day, April 4.

NAAMSA Reports March Vehicle Sales Still Strong
-------------- --


5. According to the National Association of Automobile
Manufacturers of SA (NAAMSA),March new vehicle sales
increased 29.1%, y/y, and on a month-on-month basis, the
sales increased 15.8%, compared with February 2006. New
vehicle sales reached 56,341 units in March. However,
analysts warn that March sales figures may seem overly
optimistic. In 2005, the Easter holidays happened in
March rather than in April when it occurs in 2006, which
would inflate March 2006's growth. Tony Twine, a motor
industry analyst and director of Econometrix, estimates
that about 12 percentage points of the new vehicles sales
growth is attributable to Easter being in March last year.
NAAMSA increased its growth projections for 2006 from the
previous 10% to between 15% and 20% due to a positive
macroeconomy, strong business and consumer confidence,
relatively low interest rates and vehicle affordability.
During March, all vehicle segments increased including
passenger vehicles, trucks and buses. NAAMSA expects that
strong investment and government spending on
infrastructure would support growth in sales of medium and
heavy commercial vehicles. Vehicle exports for the first
two months of 2006 were 7,869 units higher (54.4%),than
exports in the first two months of 2005. Source:
Business Day and Business Report, April 5.

Business Confidence Improves Slightly in March
-------------- -


6. The South African Chamber of Business's (SACOB)
business confidence index rose slightly in March to 100.9
from February's 100.1, although there were fewer
categories showing positive growth compared to the
previous two months. The index is made up of 13 sub-
indices representing economic indicators that affect the
business mood. Among the sub-indices are manufacturing
production, liquidations, inflation, the real prime
overdraft rate, the gold price and the rand exchange rate.
In March, the sub-indices on the exchange rate, inflation
and manufacturing output contributed negatively to the
confidence index, as did the liquidations sub-index.
SACOB expects that growth in gross domestic spending will
moderate in 2006. Source: Business Day, April 5.

Survey Shows 2005 South African FDI Higher than India
-------------- --------------


7. According to an Ernst & Young survey, the value of
mergers and acquisitions in South Africa increased 63% in
2005, leading to South Africa's foreign direct investment
(FDI) to be higher than India's 2005 FDI. Mergers and
acquisitions reached R269 billion in 2005, including Old
Mutual's R38 billion takeover of Skandia, Barclays' R30
billion purchase of Absa and Vodafone's R21 billion
acquisition of Venfin shares. R57 billion of the R269
billion was inward investment or FDI, equal to the foreign
investment of the previous five years combined. South
Africa's FDI was smaller than China's or Brazil's 2005 FDI
but was larger than India's for the first time in surveys
sponsored by Ernst & Young. The Ernst & Young survey is
one of two major gauges of mergers and acquisition in
South Africa, alongside that of Dealmakers. Using
different criteria, Dealmakers put the total value of
mergers and acquisitions at R351 billion in 2005. Source:
Business Day, April 5.

House Price Inflation Moderates
--------------


8. House price inflation continues to moderate, with
ABSA's house-price index growing nominally at 13.7% y/y in
March, compared to 14.6% in February, the lowest growth
rate since February 2002. The average middle segment
house price is now at R765,400 ($127,600). In real terms,
February house prices increased 10.3% y/y from January's
10.9% growth. ABSA expects the average nominal house
inflation in 2006 to be 12% compared to 2005's inflation
of 22.1%. Source: Business Day, I-Net Bridge, April 5.


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January Retail Sales Slow
--------------


9. According to Statistics SA, retail sales increased
5.6% y/y in January 2006 compared to December's 8.5%
growth. Consumer demand has supported higher economic
growth in South Africa over the past two years, helped by
low nominal interest rates, inflation and an emerging
black middle class. The South African Reserve Bank (SARB)
reduced its key repurchase rate by 6.5 percentage points
to 7% between 2003 and 2005, driving prime lending rates
to a 25-year low of 10.5%. SARB has repeatedly cited
strong domestic consumption as one of the risks to an
otherwise benign inflation outlook. Source: Reuters,
April 5; Business Report, April 6.

Clarification on Synthetic Fuel Tax and Mine Royalties
-------------- --------------


10. Finance Minister Trevor Manuel established timeframes
for two tax measures, committing the National Treasury to
release a new draft of the mining royalty bill by mid-May.
He also promised to announce in mid-April a task team that
would examine possible imposition of a windfall tax on
synthetic fuels. The original draft of the Minerals and
Petroleum Royalty Bill was released for public comment in
March 2003 and a final draft was expected three years ago.
South Africa's new Mining Act is based on the principle
that South Africa's mineral rights belong to the nation
and can only be leased by private companies, which must
pay royalties for the right to exploit the resources. The
royalty bill proposed levying royalty taxes ranging from
1%-8% of sales revenue, depending on what was being mined.
The proposals drew intense criticism from mining companies
and investors on the grounds that they would cut profit
margins and reduce investment in the industry,
particularly in new projects. In addition, many of South
Africa's diamond and gold mines are aging and marginal.
Hence an additional revenue tax could push many marginal
properties into closure, with the consequent job and
export revenue losses. The proposal that the royalties
would be levied on mines' gross sales revenue, rather than
on their profits, generated far more controversy than the
rates themselves. Though there have been indications that
government might cut the royalty rates, it is not clear
whether it is open to changing the basis from sales to
profits.


11. The February 2006 National Treasury Budget Review
noted that the synthetic fuel industry, which accounts for
about 35% of South Africa's domestic liquid petroleum
sales, could receive substantial economic rents when crude
oil prices were high. The review also pointed out that
these windfall gains should be shared with the public
since the synthetic fuel industry had developed with
extensive government support. Manuel announced the task
force would examine imposing windfall taxes on the
synthetic fuel industry. Source: Business Day, April 4.

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