SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER DECEMBER 15,

UNCLAS SECTION 01 OF 03 PRETORIA 005039 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 SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD EMIN EPET BEXP KTDB SENV PGOV SF SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER DECEMBER 15, 2006 ISSUE PRETORIA 00005039 001.2 OF 003 ¶1. (U) Summary. This is Volume 6, issue 27 of US Embassy Pretoria's South Africa Economic News weekly newsletter. Topics of this week's newsletter are: - DTI rolls out B-BBEE Scorecard; - SARB Governor complains about credit madness; - South Africa's technological innovation; - The Competition Tribunal approves sale of V&A Waterfront; - DA rates the Economic Cabinet; - 2006/2007 corn forecast; - Key economic ratios changed. End Summary. DTI rolls out B-BBEE Scorecard -------------- ¶2. (U) The Department of Trade and Industry rolled out the Broad-based Economic Empowerment (B-BBEE) scorecard on December 14, a week after Cabinet approved the second phase of the B-BBEE codes. According to Department of Trade and Industry Deputy Director General Lionel October, this clears the way for SAG to "Gazette the codes and five sector charters before end of January." The Cabinet-approved version of the codes includes a string of concessions. Multinationals with a global policy on sole ownership of subsidiaries in other countries will be exempted from the equity component of the B-BBEE scorecard, but will have to make up for the allowance with alternative measures. Medium-sized companies with a turnover from R5 to R35 million (up from R25 million) may choose from four of seven components from which they have to comply. Small companies with a turnover of R5 million or less will be exempt from having to comply with any B-BBEE requirements. The codes have also been simplified and include the principle of "once empowered, always empowered." This will allow BEE owners to sell their shares in BEE-qualified companies to take advantage of higher stock prices without the companies losing their BEE status. There will also be a limitation on the extent to which deals with employee trusts (i.e., pension funds) would be recognized as BEE deals. This would leave a partial bias against broad-based minority employee ownership of BEE-qualified companies. SARB Governor complains about credit madness -------------- ¶3. (U) South African Reserve Bank Governor Tito Mboweni complained about credit "madness" when he announced last week's decision to raise the benchmark lending rate by 50 basis points, or 0.5%, to 9.0%. The commercial bank prime lending rate and mortgage rate are now 12.5%. Mboweni previously complained about "excessive exuberance," and expressed the need for consumers to "tighten their belts, whether they are rich or poor." The consumers appear to have ignored these warnings, based on credit extension, retail sales and the rise in the business and consumer confidence indexes. For example, private sector borrowing grew at 27.5% in October y-o-y, mortgages jumped 30.9%, bank credit extension rose 28.6%, and other loans and advances increased 26%. Retail sales grew 13% in September y-o-y, the fastest rate since 1999. The South African Chamber of Commerce (SACOB) business confidence index was a record 103.2 in November. The Stellenbosch University Bureau for Economic Research (BER) index for the manufacturing sector rose to an eleven-year high, and the BER's consumer confidence index rose to 18 in the third quarter. One exception to this general optimism was a slight downturn in passenger car purchases in November. The SARB is expected to raise interest rates again on February 15. It is not clear whether this general optimism reflects a last minute purchasing binge before the impact of the higher interest rates set in, a refusal to accept economic reality, or a genuine disagreement with Mboweni's concern about inflation. South Africa's technological innovation -------------- ¶4. (U) South Africa has a long history of technological innovation, which has grown exponentially since independence in 1996. Several key South African inventions such as the Lodox Statscan, the mine-protected armored vehicle technology, and the Kreepy Krauly automatic pool cleaner are used throughout the world. Others are stuck in the gap between invention and marketing. The South Africa Department of Science and Technology (DST) aims to narrow that gap through its Patent Support Fund, Innovation Fund and the "Big Idea" forum. PRETORIA 00005039 002.2 OF 003 The Competition Tribunal approves sale of V&A Waterfront -------------- 5.(U) The Competition Tribunal approved Transnet's sale of the Victoria and Albert Waterfront in Cape town to the broad-based consortium London and Regional for $1 billion (R7 billion) without conditions. The only requirement that remains is the making of the cash payment which is due on December 29. The investors have also agreed to invest another $143 million (R1 billion) to upgrade the investment. This investment follows Barclay's $5.5 billion purchase of the ABSA bank and Vodafone's $2.4 billion investment in the Vodacom cellular phone company as the largest foreign investments in the last 15 months. All three of these investments were purchases of existing properties. The next major investment is expected to be Alcan's soon-to-be-announced greenfield investment of $2.7 billion in an aluminum refinery in the Coaga industrial complex 30 kilometers east of Port Elizabeth in the Eastern Cape Province. DA rates the Economic Cabinet -------------- ¶6. (U) The opposition Democratic Alliance party released its annual report card for the cabinet. The average score dropped from 5 in 2004 to 4.5 in 2005 to 4.3 in 2006 on a scale of 1 to 10. Minister of Finance Trevor Manuel and Minister of Science and Technology Mosibudi Mangena both received a score of 7, the highest scores of any cabinet members. There rest of the economic ministers received above average to slightly below average scores, led by Minister of Minerals and Energy Buyelwa Sonjica (6),Minister of Public Enterprises Alex Erwin (5),Minister of Transport Jeff Radebe (5), Minister of Agriculture and Land Affairs Lulu Xingwana (5),Minister of Environmental Affairs and Tourism Marthinus van Schalkwyk (4.3), Minister of Trade and Industry Mandisi Mpahlwa, and (4) Minister of Communications Ivy Matsepe-Casaburri (4). On average, the social ministers received much lower ratings than the economic ministers. ¶7. (U) DA leader Tony Leon praised Manuel for "his continuing stylish management of South Africa's booming economy" when introducing the report. The DA report noted Manuel's decline from a score of 8 in 2004 and 2005 and criticized his "dogged disregard for the power of fiscal policy," lack of boldness "in making investing in South Africa, employing South Africans or exporting from South Africa more attractive," "his meek acquiescence to some of the government's more contentious, large-scale spending projects, and his refusal to consider a more expansionary approach that would favor taxpayers and incentivise investment." Minister of Trade Mpahlwa was described by the DA report as "gentlemanly and serene" but was criticized "for a lifeless performance." The report went on to say that he "never speaks up on any issues of note, he does not seem actively to build relationships with stakeholders, and he does not seem to be particularly busy behind the scenes." He was also criticized for his silence when the Doha round of world trade negotiations faltered and trade quotas were set on Chinese textile imports. Leon faulted Minister of Communications Matsepe-Casaburri for "her ongoing reluctance to take on Telkom (the state telecommunications company),whose monopolistic practices make South Africa one of the most expensive places in the world to communicate." 2006/2007 corn forecast -------------- ¶8. (U) During the 2005/2006 crop year, South African corn farmers voluntarily cut back production, successfully reducing surplus stocks. Coupled with high international prices, this cutback now contributes to better prospects for the crop that has just been planted. FAS expect the current area planted to increase by more than a million hectares to 3.2 million hectares. Assuming normal rainfall, the crop may reach 10.5 million tons, up from 6.9 million tons last year. This would help guarantee a healthy GDP growth figure for 2007, since GDP growth in 2006 was undercut by a 40% decline in maize plantings that resulted in a 15% contraction of the agricultural sector. Key economic ratios changed -------------- ¶9. (U) Based on Statistics South Africa's revisions to the GDP PRETORIA 00005039 003.2 OF 003 growth data and the South African Reserve Bank's revisions to other economic data, important economic ratios have also changed. These ratios have been revised as follows: 2006 2005 1Q 2Q 3Q -------------- -------------- Current account balance to GDP -------------- Previous ratio -4.2% -6.4% -6.1% - Revised ratio -3.8% -6.1% -5.7% -5.2% Investment to GDP -------------- Previous ratio 17.2% 17.9% 18.4% - Revised ratio 17.0% 17.9% 18.5% 18.7% Savings to GDP -------------- Previous ratio 14.0% 13.0% 13.7 - Revised ratio 14.5% 13.6% 14.2% 14.8% Government debt to GDP -------------- Previous ratio 35.7% 33.7% 34.8% - Revised ratio 35.4% 33.3% 34.5% 34.8% Fiscal deficit (-)/surplus (+) to GDP -------------- Previous ratio -0.3% 0.5% -1.1% - Revised ratio -1.1% 0.4% -1.1% 0.6% BOST