Identifier
Created
Classification
Origin
06PRETORIA1943
2006-05-12 10:03:00
UNCLASSIFIED
Embassy Pretoria
Cable title:  

SOUTH AFRICA ECONOMIC NEWSLETTER MAY 12 2006

Tags:  ECON EINV EFIN ETRD BEXP KTDB PGOV SF 
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R 121003Z MAY 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3352
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 03 PRETORIA 001943 

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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 MAY 12 2006
ISSUE


UNCLAS SECTION 01 OF 03 PRETORIA 001943

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 MAY 12 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:

- Manufacturing Production Recovers in March;
- Record Credit Growth Sparks Inflation Concerns;
- Tourism Industry Key Contributor to Higher Growth;
- Net Reserves Above $20 Billion;
- SARS Expects to Increase 2006 Tax Returns;
- 5% Import Duty on Steel Removed;
- Treasury Withholds Funds to Four Cities for the First Time;
and
- South Africa Improves in Competitive Rankings.
End Summary.

Manufacturing Production Recovers in March
--------------


2. Manufacturing production resumed its over 5% growth in
March, reaching 5.7% from February's growth of 4%. So
far, 2006's manufacturing growth has shown substantial
improvement, with production growing by 5.2% during the
first quarter 2006, compared to 4th quarter 2005's growth
of 3.5%. The major contributors in the acceleration of
first quarter's growth include the motor vehicle,
petroleum and chemicals, and textile industries, although
communication and glass and non-metallic product
industries showed declines in quarterly growth. The
recent acceleration in manufacturing growth matches
similar improvement shown by other indicators of
manufacturing activity, such as Investec's Purchasing
Manager's Index (PMI). For the past two months, PMI has
indicated that current manufacturing activity has
expanded, with trade expectations at levels indicating
activity should improve over the next six months. Source:
Statistics SA Release P3041.2 and Standard Bank's
Manufacturing Unpacked, May 11.

Record Credit Growth Sparks Inflation Concerns

-------------- -


3. In March, private sector credit demand increased by
24.3%, from February's 21.5% growth, and higher than the
expected 22.4% increase. March's increase in private
sector credit demand is the single largest monthly
increase. M3, the broad measure of money supply, grew by
26.8% in March compared to a 21.1% increase in February.
In March, mortgages increased by 30%, investments by 28%,
installment sales by 19%, and leasing finance by 21%. Tax
relief for individuals announced in the February budget
and strong growth in equity markets might have increased
deposits with the banking sector, while the sharp
reduction in transfer duties on property might have been a
factor leading to sharp growth in mortgages. In the
fourth quarter 2005, household debt to disposable income
reached 65.6% and the latest credit growth suggests that
debt levels will continue to increase. Johan Rossouw, the
chief economist at Vunani Securities, said while consumer
borrowing had pushed debt ratios to record levels, the
cost of servicing debt remained relatively low, about 7%
of disposable income. He viewed the latest credit growth
increasing the probability of a rate increase at the next
Monetary Policy Committee meeting to 50%. Source:
Standard Bank's Money Supply Alert, May 5; Business
Report, May 8.


4. Comment. The next Monetary Policy Committee meeting
is scheduled for June 7. Recent statements by both South
African Reserve Bank governor Tito Mboweni and Finance
Minister Trevor Manuel have pointed out the dangers of
increasing consumer debt if interest rates rise, leading
to increasing expectations of the SARB leaning towards
future interest rate hikes. Although most expect interest
rates to remain unchanged in June, a growing number of
forecasts expect higher interest rates by year end. End
comment.

Tourism Industry Key Contributor to Higher Growth
-------------- --------------


5. Deputy President Phumzile Mlambo-Ngcuka emphasized the
importance of tourism in meeting the Accelerated Shared

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Growth Initiative's goal of increasing South Africa's
growth to 6% by 2010. Currently, tourism created one job
for every 12 tourists arriving in South Africa. The
number of tourists arriving in South Africa reached 7
million in 2005, compared to 1 million in 1990. More than
60% of South African arrivals were from Africa. Mlambo-
Ngcuka said government was working to increase air slots
in line with demand. A `univisa' granting easier travel
access to visitors from Southern African Development
Community countries was also planned. Most tourists
travel to three provinces: KwaZulu-Natal, Gauteng, and
Western Cape. Mlambo-Ngcuka wants to diversify tourist
destinations to achieve higher growth in other parts of
the country. Source: Business Day, May 8.

Net Reserves Above $20 Billion
--------------


6. South Africa's net reserves rose by $579 million (R3.5
billion) in April to reach $20.07 billion slightly above
$20 billion, a level seen internationally as a milestone
for emerging markets. Gross reserves increased to $23.8
billion from $23 billion at the end of March. The
improvement in South African reserves has led several
credit rating agencies to improve their South African
ratings. In August 2005, Standard & Poor's increased
South Africa's long term foreign currency and local
currency ratings on South Africa to BBB+ and A+,
respectively, equivalent to Moody's rating of Baa1, with
both ratings being 3 notches above junk status. Moody's
rated South Africa two levels above India and five above
Brazil's ratings score. However in April, Moody's
suggested that South Africa's widening current account
deficit could prevent a further upgrade in its credit
rating in the near term. South Africa's deficit on
current account reached 4.2% of GDP in 2005 from 2004's
3.4% of GDP. The increasing deficit on the current
account will put pressure on the rand if it is not
financed by incoming capital inflows. Source: Business
Report, May 9.

SARS Expects to Increase 2006 Tax Returns
--------------


7. According to Finance Minister Trevor Manuel, the South
African Revenue Service (SARS) expects to increase SA's
national tax returns by 8%-12% in 2006. SARS also plans
to process 80% of correctly compiled tax returns within 90
days during peak periods (July to February) and 34 working
days during off-peak periods. Tax returns increased 8% in
2005, where 14 million returns were processed, with
330,000 new taxpayers. Currently, there are about 1.4
million corporate taxpayers and 4.5 million individual
taxpayers on the register. SARS also introduced an
electronic submission facility for 2.7 million taxpayers,
planned to be available from June 1. According to Manuel,
improving of tax compliance in South Africa had
contributed to a reduced budget deficit, significant tax
relief, and a general lower tax burden for all. SARS
collected R418.1 billion in fiscal 2005-06, exceeding a
revised target of R417 billion. Source: Business Day,
May 10.

5% Import Duty on Steel Removed
--------------


8. Mandisi Mpahlwa, the Minister of Department of Trade
and Industry (DTI),signed regulations to remove the 5%
duty on steel imports. A review of the import-parity
pricing policies is continuing and should be completed by
June. The review will determine which specific
legislative changes will be introduced to the Competition
Act. Tshediso Matona, the Acting Director-General in DTI,
emphasized that proposed changes in the import pricing
policies would involve all concerned industries and not
just the steel industry. Source: Business Report, May

10.

Treasury Withholds Funds to Four Cities for the First Time
-------------- --------------


9. For the first time, National Treasury withheld grants
worth R95 million ($15.8 million, using 6 rands per
dollar) from Cape Town, Nelson Mandela (Port Elizabeth),

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Emfuleni (Vereeniging) and Mangaung (Bloemfontein)
metropolitan councils, because they failed to comply with
conditions laid down for the grants. At a hearing in
Parliament, Lungise Fuzile, Treasury's Deputy Director-
General for intergovernmental relations, described the
conditions that each municipality had to fulfill before
the restructuring grants could be given. Indicators
include regular credit ratings by independent assessors,
sustainable debt ratios, and a revenue collection ratio
approaching 97%. Municipalities had to show consistent
progress towards these goals. The amount of withheld
money was relatively small. Cape Town lost R30 million
($5 million),Nelson Mandela R20 million ($3.3 million),
Emfuleni R35 million ($5.8 million),and Mangaung R10
million ($1.6 million). Source: Business Report, May 11.

South Africa Improves in Competitive Rankings
--------------


10. In the annual IMD International's World
Competitiveness Yearbook, South Africa improved by 2
positions, reaching 44th out of 61 countries ranked, due
to better governance. South Africa's current ranking is
closer to its highest of 39th in 2002. Its 2003 and 2004
rankings declined to 47 and 49, respectively, although 10
additional economies were included in the overall rankings
in 2003. The ranking is based on government efficiency,
business efficiency, economic performance and
infrastructure. The biggest gain was in government
efficiency with the country moving from 34th place to
28th. Reasons for the improvement included the lower
effective personal income tax rate as a percentage of GDP,
management of public finances and policy direction of
government. Factors holding back further improvement in
South Africa's governance ranking included immigration
laws, personal security and labor regulations. South
African business improved its ranking to 38th place from
40th place in 2005. Improvements in business came because
of a rise in stock market capitalization as a percentage
of GDP, a rise in the female labor force as a percentage
of total employment, social responsibility of business
leaders, protection of shareholder rights, and improved
auditing and accounting practices. Leading to
deterioration in South African business competitiveness
was the unavailability of skilled labor, a decline in the
labor force as a percentage of the population, the brain
drain and worsening labor relations. South Africa's worst
performance was its infrastructure ranking, dropping to
60th place from 2005's 58th ranking. In terms of economic
performance, South Africa fell from 42nd to 46th. The
report listed overall factors that influenced South
Africa's ranking. Among the improvements noted were
direct and portfolio inward investment, total reserves,
high technology exports, value traded on the JSE, ease of
doing business, a reduction in tax evasion, the legal and
regulatory framework, and quality of life. The negative
factors include a rise in the consumer price index from
1.4% in 2004 to 3.4% in 2005, a fall in direct investment
abroad, a larger current account deficit, concerns about
energy infrastructure, a decline in tourism receipts, a
decline in exports of commercial services, the brain drain
and poor implementation of government decisions. Source:
Business Report, May 11.

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