SOUTH AFRICA ECONOMIC NEWSLETTER FEBRUARY 17 2006

UNCLAS SECTION 01 OF 03 PRETORIA 000722 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 FEBRUARY 17 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: - Lowest Budget Deficit in 25 Years, Growth May be Above 5%; - Tax Relief Aimed At Individuals; - Corporate Tax Changes; - Increased Government Expenditures on Social Services and Infrastructure; - South Africa Eases Foreign Exchange Controls on Individuals; and - High Voter Turnout Predicted by IEC End Summary. Lowest Budget Deficit in 25 Years, Growth May be Above 5% -------------- -------------- ¶2. A strong economy and improved tax collection gave South Africa its lowest budget deficit in 25 years after tax revenues increased by more than 18% in 2005. The National Treasury estimated 2005/06 budget deficit had been revised down to 0.5% of GDP compared to an October 2005 estimate of 1% and a February 2005 estimate of 3.1%. That would be the lowest budget deficit since 1981's deficit/GDP of 0.4%. Strong economic growth meant the government collected R41.2 billion ($6.9 billion, using 6 rands per dollar) more revenue in the 2005/06 fiscal year (ending on March 31),than it had estimated in the February 2005 budget. The government also forecast smaller deficit/GDP ratios for each of the next three years even as it increases its expenditure growth. South Africa's budget deficit was estimated at 1.5% of GDP in fiscal 2006/07, easing slightly to 1.4% in 2007/08 and reaching 1.2% 2008/09. These revised estimates compare to previous forecasts of 2.2% of GDP in fiscal 2006/07, 2.1% in 2007/08 and 2% in 2008/09, made last February. The Treasury also lowered its forecast for public sector borrowing to 0.6% of GDP in fiscal 2005/06 and an average of 2.4 percent over the next three years. Last February, Treasury estimated public sector borrowing at an average of 3.5% between 2006 and 2008. Treasury expects South African growth of 5% in 2005, up from 4.5% in 2004, and the highest growth since 1984. Source: Reuters and Nedbank's Budget 2006, February 15; Business Day and Business Report February 16. Tax Relief Aimed at Individuals -------------- ¶3. In his budget speech, Finance Minister Trevor Manuel announced tax cuts for individuals, small businesses and retirement savings, but left the corporate tax rate unchanged at 29%. Personal taxes were cut by R13.5 billion ($2.3 billion) with 73% of the reductions focused on individuals earning R250,000 ($42,000) or less. The top tax bracket at which the 40% marginal rate applies will increase to R400,000 ($67,000) from R300,000 ($50,000),while the tax threshold at which employees begin paying tax increases to R40,000 ($6,700) from R35,000 ($5,800),beginning in April. The tax on retirement savings was reduced by half to 9% starting March 1 in order to boost South Africa's low savings rate. Taxes on property were reduced with the lower limit of property value being subject to taxes increased to R500,000 ($83,000) compared to the previous threshold of R190,000 ($32,000). Since 1996, there has been more than R80 billion ($13 billion) in personal income tax reductions, mainly aimed at lower and middle income groups. The only tax increases apply to alcohol and tobacco which will increase between 9% and 20% and between 5 and 10%, respectively. Source: Business Day and Business Report, February 16. Corporate Tax Changes -------------- ¶4. The Finance Minister also increased the pool of firms eligible for small business loans. Small businesses are now defined as having annual revenues of R14 million ($2.3 million) compared to last year's definition of R6 million ($1 million). Manuel also announced that the income PRETORIA 00000722 002 OF 003 threshold for the lower 10% corporate tax rate would increase to R300,000 ($50,000) from R250,000 ($42,000) in ¶2005. Industry analysts had expected the Minister to reduce the top corporate tax rate, currently at 29%, or the secondary tax on companies, at 12.5%, but neither happened. The regional services taxes, payable to municipalities, were abolished amounting to a tax reduction of R7 billion. The Minister made no announcement on the tax's replacement. The Treasury also raised thresholds for capital gains tax to account for inflation. Source: Reuters and Nedbank, February 15. Increased Government Expenditures on Social Services and Infrastructure -------------- -------------- ¶5. Spending on social services remains the key priority over the next three years, accounting for 53% of total spending in 2006/07 and increasing 12% per year. An additional R34 billion ($5.7 billion) is planned for infrastructure spending over the 2006-2009 Medium Term Expenditure Framework. All government expenditures during 2005/06 fiscal year increased by 13.7%, higher than the 12.9% planned in the February 2005 National Budget and the 12.8% increase posited in October 2005 Mid Term Budget Policy Statement. In 2006/07 expenditure should increase 12.8% with an annual average of 10.9% over the next three years. As a percentage of GDP, expenditures will increase from 26.9% in 2005/06 to 27.6% for the next year and easing to 27.3% by 2008/09. Social security grants will increase by a total of R80.6 billion ($13 billion). Disability and old age grants rise to R820 ($137) per month, an increase of R40. The foster care grant is now R590 ($98) per month, an increase of R30. Finally, the child support grant (reaching children up to the age of 14) increases by R10 to reach R190 ($32) per month. Expansions in the commuter rail network, water and road infrastructure will increase infrastructure spending sharply as South Africa prepares for the 2010 World Cup and implements the Accelerated and Shared Growth Initiative. Source: The Star, Business Report, February 16; Nedbank February 15. South Africa Eases Foreign Exchange Controls on Individuals -------------- -- ¶6. Finance Minister Manuel announced another easing of foreign exchange restrictions on individuals. Individuals may now transfer up to R2 million ($330,000) offshore a year, up from the previous limit of R750,000 ($125,000). To promote investment in other African countries, companies will no longer have to own a majority stake in a foreign firm to invest elsewhere on the continent. The present foreign direct investment threshold of 50 percent will be lowered to 25 percent for investments by South African corporations and parastatals. Manuel said the government's foreign exchange control amnesty had raised R2.9 billion ($480,000) in fees and R1.4 billion ($200,000) in taxes from money previously parked illegally offshore. Manuel identified total assets of R68.6 billion ($11 billion) from 42,672 applications for amnesty and announced the completion of the amnesty program announced in February 2003. The Treasury said 42,184 amnesty applications were approved, 924 were withdrawn and only 20 applications were declined, with approximately 70% of the disclosed assets illegal. The revenue raised through amnesty fees will be used in public-private partnership investments in community infrastructure and business development in low income areas. Source: Reuters, February 15; Budget Speech 2006, February 15. High Voter Turnout Predicted by IEC -------------- ¶7. According to a survey sponsored by the Independent Electoral Commission (IEC),80% of registered South Africans plan to vote in the upcoming municipal election on March 1. Other polls have predicted that voter turnout could be as low as 40% compared to an average of 48% turnout in the past two local elections. The Human Sciences Research Council conducted the survey of 5,000 people in October 2005. According to the survey, voters in the Western Cape and Northern Cape provinces were the PRETORIA 00000722 003 OF 003 least likely to vote because of a lack of interest and disillusion in politics, having the wrong identity documents or not being registered. Half of all respondents criticized the floor-crossing legislation, with the Western Cape registering the strongest disapproval at 72%, followed by Free State and Northern Cape provinces. According to IEC, more than 21 million eligible voters out of a possible 27 million have registered to vote for the March 1 election. Source: Business Day, February 15. TEITELBAUM