SOUTH AFRICA ECONOMIC NEWSLETTER MAY 19 2006

UNCLAS SECTION 01 OF 03 PRETORIA 002066

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 19 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:

- Reserve Bank Highlights Growth Prospects, Inflation
Within Targets;
- Vehicle Exports Increase by 58%;
- Survey Shows Regulations Greatest Constraint to Business
Expansion;
- Transnet and Unions Sign Restructuring Agreement;
- Koeberg's Unit 1 Operational;
- Business and Consumer Confidence Important; and
- Spending on Conditional Grants Examined.
End Summary.

Reserve Bank Highlights Growth Prospects, Inflation Within
Targets
-------------- --------------


2. At the May 11th semiannual Monetary Policy Forum
meeting, officials from the South African Reserve Bank
(SARB) explained their reasons for leaving interest rates
unchanged. The SARB's reasons included lowered inflation
expectations since November 2005 and inflation remaining
within the 3%-6% target range for 31 consecutive months.
The SARB expects inflation to remain within its target
range over the next several years. However, risks to
inflation remain the same. Increasing current account
deficits, rising oil prices, strong consumer demand and
increasing household debt levels still worry the SARB as
potential harbingers of accelerating inflation. According
to SARB research, economic growth may accelerate to 5.1%
if the government halves unemployment in 10 years,
attracts another $804 million (R4.9 billion) a year in
foreign direct investment and raises the savings rate to
22% of GDP. Currently, SARB research estimates growth
with stable inflation at 4.1%. The South African
government is targeting annual growth of 6% by 2010 to
help reduce the official jobless rate of 26.7%, which is
the highest of 61 countries tracked by Bloomberg. The
SARB's latest quarterly inflation forecast showed that the
targeted inflation rate, consumer prices without mortgage
costs, should accelerate to just below 5% in the first
quarter of 2007 and then remain slightly above the middle
of the target range until the first quarter of 2008.
Source: Business Report, May 12.

Vehicle Exports Increase by 58%
--------------


3. According to the National Association of Automobile
Manufacturers of SA (NAAMSA),new export contracts by
major automobile manufacturers caused South African
vehicle exports to grow by 58% in the first quarter 2006.
Vehicle manufacturers such as Volkswagen SA, Toyota SA,
Daimler Chrysler SA and Ford Southern Africa have
multibillion rand export contracts, while General Motors
SA (GMSA) has said it would make the country its main
export base for its Hummer H3 vehicles. New vehicle
exports increased from the fourth quarter 2005's level of
24,442 units to 38,541 units during the first quarter

2006. NAAMSA predicts that exports of vehicles should
increase by 50% in 2006. During 2005, vehicle exports
reached 140,000. Employment in the motor vehicle industry
reached 36,184 during the first quarter 2006, 3% higher
than the 4th quarter of 2005 and the highest aggregate
level in the past 8.5 years. In the first quarter, sales
for passenger vehicles increased 21% (y/y),while new
commercial vehicle sales increased 24% (y/y). Over the
past three years, prices of new cars (denominated in
rands) have remained relatively stable. According to
Wesbank, the average price of a new car in 2005 was
R183,744 compared with the average price in 2002 of
R185,037. Using the Automobile New Car Spend Index, over
the past 15 years there had been only one spike in the
average price of new vehicles between 2001 and 2002.
Source: Business Day, May 16.

Survey Shows Regulations Greatest Constraint to Business
Expansion
-------------- --------------


PRETORIA 00002066 002 OF 003



4. For the second consecutive year, Grant Thornton's
International Business Owners Survey (IBOS) showed that
regulations were the greatest constraint to the expansion
of business in South Africa. According to the survey,
based on medium-sized businesses employing between 50 and
250 people, the proportion of people who cited this as the
major constraint had risen to 45%, up from 41% in 2005.
Small business owners reported varied experiences. Some
cited complex black economic empowerment regulations and
difficulties in registering businesses as examples of
increased business costs due to regulation. The survey
also found that 44% of business owners said that the lack
of a skilled workforce posed a threat, up from 36% in

2005. The manufacturing sector is the most affected, with
51% of business owners citing regulation costs as a
problem, while 48% cite a lack of skills as a major
constraint to their business growth. Business growth in
the wholesale and retail sectors is least affected by cost
of regulations. Source: Business Report, May 16.

Transnet and Unions Sign Restructuring Agreement
-------------- ---


5. South Africa's Transnet has signed an agreement with
four unions to guide the restructuring of the rail and
logistics group, resolving a nine month dispute that
caused a series of strikes. Under the agreement, Transnet
will set time frames for the disposal of non-core
businesses and consult unions on strategic and operational
issues. Transnet plans to dispose of about R7.7 billion
($1.3 billion, using 6 rands per dollar) worth of non-core
assets to achieve more focused management goals. The
streamlining of Transnet is crucial to effective capital
expenditure program of R40 billion over the next five
years aimed at improving transportation infrastructure.
Unions had been worried the restructuring process could
cost 30,000 jobs. Both the government and Transnet have
repeatedly stressed there would be no layoffs. The
disposal of non-core assets does not include national
carrier South African Airways (SAA),which will remain
government-owned, directly under the Department of Public
Enterprises rather than Transnet's jurisdiction. Source:
Reuters, May 17.

Koeberg's Unit 1 Operational
--------------


6. Unit One at Koeberg Power Station in the Western Cape
was successfully returned to service after being out of
commission for the past five months for repairs. The
generator was damaged in December 2005, resulting in both
the rotor and stator (upon which the rotor rotates)
requiring repair. The stator was repaired at Koeberg,
while a replacement rotor was obtained from the French
utility, EdF. Eskom expects Koeberg Unit 1 to be
operating at full power during the last week in May 2006.
Koeberg Unit 2, however, will be shut down on 22 May as
scheduled for refueling and maintenance, remaining offline
through most of July. According to Eskom's Chief
Executive Thulani Gcabshe, a shortfall of up to 400 MW may
be experienced in the Western Cape during this period.
Demand side management measures such as the issuing of
five million Compact Fluorescent Lights (CFL's) to the
Western Cape and the swapping out of two plate electric
stoves for two plate gas stoves have begun to mitigate the
shortage, and so far minimal load shedding has occurred.
Source: I-Net Bridge, May 18.

Business and Consumer Confidence Important
--------------


7. Investec economists Brian Kantor and Carmen Marchetti
view consumer confidence as more important in maintaining
a country's high growth rather than indicators such as
current account deficits or the level of household debt.
They argue that if South African debt is compared to net
wealth, the recent increases in debt levels become quite
sustainable. In South Africa, net wealth as a percentage
of disposable income has risen from 256% in 2002 to 374%
in 2005. The Investec strategy report predicts that the
household debt-to-income ratio will rise to above 70% over
the next two years compared to 4th quarter's 65.5%.
Confidence is a vital strategic asset and a lack of it has
restrained growth in many economies in recent years,

PRETORIA 00002066 003 OF 003


including Japan's and several in Europe. High business
and consumer confidence due to stable interest rates will
lead to faster economic growth. Robust household spending
will lead to higher capital inflows, which will help
finance higher growth and maintain a relatively strong
rand, providing a check to increasing domestic inflation.
Source: Business Report, May 17.

Spending on Conditional Grants Examined
--------------


8. The Finance and Fiscal Commission found that the
spending of conditional grants (grants designed to be
spent for a specified purpose) at national and provincial
levels was not properly monitored. The Commission
examined several health conditional grants to illustrate
conditional grant shortcomings. According to the
Commission's findings, new conditional grants have been
introduced without regard to their relationship to
existing grants, with several uncoordinated grants serving
the same purposes. In addition, the Commission's report
pointed out that there were no pre-implementation plans
and assessments that identified potential risks that might
impede implementation, nor were there guidelines to
mitigate such risks. Conditions for spending were not
specified in detail and provinces were not required to
meet minimum standards. The Commission asserted that
misdirected spending of two conditional health grants
worth R6.5 billion ($1.08 billion) undermined public
health goals and that these grants have not been
independently reviewed since they began in 1998. The
Commission's report claimed that public hospitals received
only 52% of the funds necessary to provide a reasonable
service. There were also 10.4% fewer hospital beds for
the sick than there should have been. The Commission, set
up under the constitution to advise the Treasury on the
division of revenue between national, provincial and local
governments, presented its recommendations for 2007-08
allocations to the National Council of Provinces. Source:
Business Day and Business Report, May 16.

TEITELBAUM