SOUTH AFRICA ECONOMIC NEWSLETTER FEBRUARY 17 2006

UNCLAS SECTION 01 OF 03 PRETORIA 000722

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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

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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

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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