SOUTH AFRICA ECONOMIC NEWSLETTER MARCH 3 2006

UNCLAS SECTION 01 OF 02 PRETORIA 000888

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 MARCH 3 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:

- Fourth Quarter GDP Growth Slows Sharply; Yearly Growth
at 4.9%;
- Credit Demand Picks Up;
- Mortgage Market Expected to Benefit from Proposed Tax
Changes in 2006 Budget;
- SA's Public Private Partnerships; and
- January Trade Deficit Increases.
End Summary.

Fourth Quarter GDP Growth Slows Sharply; Yearly Growth at
4.9%
-------------- --------------


2. South Africa's GDP grew at the slowest pace in two
years during the fourth quarter 2005 after the rand's
strength slowed manufacturing and mining production.
According to Statistics SA (Stats SA),GDP increased 3.3%
(annualized) in the fourth quarter from 4.2% in the
previous quarter and significantly slower than the Reuter
economists' poll forecast of 4%. For 2005, GDP grew by
4.9%, the fastest in more than two decades, from 4.5% in

2004. The 2005 growth came in at slightly below National
Treasury's estimate of 5%, published in the 2006 Budget
Review, released February 15. The slower fourth quarter
growth was due to a 4.5% contraction in the mining sector,
which accounts for 6.3% of GDP, and a 0.3% contraction in
manufacturing at 16.4% of GDP. The wholesale and retail
trade and hotel and restaurant sector contributed most to
the 2005 fourth quarter growth, accounting for 1.2
percentage points. The finance, real estate and business
services sectors contributed 0.7 percentage points, while
the transport, storage and communications industries
contributed 0.6 of a percentage point, according to Stats
SA.


3. Table 1 shows seasonally adjusted fourth quarter and
annual 2005 growth rates and the relative importance in
the fourth quarter 2005 for important sectors.
Industry Q405 %GDP Q405 Growth 05 Growth
-------------- -------------- -------------- --------------
Mining/quarrying 6.3% -4.5% 3.1%
Manufacturing 16.4% -0.3% 4.1%
Construction 2.8% 12.4% 10.0%
Trade 13.8% 9.0% 6.1%
Transp./Communic. 9.9% 6.5% 5.6%
Finance/Real Estate 19.5% 3.7% 7.7%
GDP 3.3% 4.9%


4. In the fourth quarter, production disruptions of oil
refineries leading to fuel shortages and the strong rand
negatively affected manufacturing production. Strong
consumer spending supported growth in the retail and
wholesale sector and construction sectors. For the next
three years, National Treasury expects GDP growth to reach
4.9%, 4.7% and 5.2% for 2006, 2007 and 2008, respectively.
Quarterly growth from 1998 until 2005 along with a (log)
trend line, illustrates how future growth has to
accelerate in order to reach the government's growth
target of 6% by 2010 so that unemployment and poverty is
halved by 2014. Economic growth has averaged 3.4% since
1994, up from 1% during the previous 10 years. Source:
Business Report and Business Day, March 1; Stats SA
Release P0441 and SAPA, February 28.

Credit Demand Picks Up
--------------


5. According to the South African Reserve Bank (SARB),
demand for credit by the private sector rose by 20.4% in
January, slightly above expectations of 20.1%, and faster
than December's revised growth of 19.6%. The broadly
defined measure of money supply (M3) increased 19.7%,
above the consensus expectations of 18.4%, from December's
increase of 19.9%. South Africa's total domestic credit
extension grew by 16% y/y in January from 14.7% in
December. The SARB also indicated that its international
liquidity position rose to $18.7 billion in January from
$17.2 billion in December. Source: I-Net Bridge and

PRETORIA 00000888 002 OF 002


Business Day, February 28.

Mortgage Market Expected to Benefit from Proposed Tax
Changes in 2006 Budget
-------------- --------------


6. ABSA bank expects mortgage growth to benefit from the
Budget announcement on transfer duty on property. ABSA
projects average nominal housing prices to increase by 12%
in 2006 compared to 2005's growth of 21.9%, while
mortgages should increase between 22% and 24%, compared to
2005's growth of 27.6%. Finance Minister Trevor Manuel
announced that mortgages of up to R500,000 ($83,000, using
6 rands per dollar) will no longer have to pay transfer
taxes as from March 1. According to the South Africa
Reserve Bank, mortgage advances by the monetary sector
increased 27.4% year-on-year in January 2006, which was
marginally lower than a growth rate of 27.6% recorded in
December 2005. According to ABSA, the declining trend in
mortgage advances growth since October 2005 resulted from
a slowing residential property market. Source: I-Net
Bridge, Sunday Times, February 28.

SA's Public Private Partnerships
--------------


7. Over the next three years, the National Treasury's
public-private partnership (PPP) office expects R20
billion ($3.3 billion) worth of PPPs as the government
pushes for more private sector participation in the
country's multibillion-rand infrastructure development
program. The PPP unit, which was formed in 2000, had
facilitated investment in public infrastructure by the
public and private sector amounting to R6 billion ($1
billion). At present, there are 50 PPPs at a feasibility
stage or on offer in the market. The R20 billion ($3.3
billion) Gautrain rapid rail project is one example of a
planned PPP. Although only responsible for PPP projects
involving the South African government, the PPP office
expects additional PPP projects with state-owned
enterprises in the areas of electricity, telecoms,
railways, ports and the restructuring of Transnet. Bill
Lacey, an economic consultant at the South Africa Chamber
of Business, argue that while increased PPP participation
at the national level looks promising, local involvement
remains problematic due to lack of capacity. Source:
Business Report, March 2.

January Trade Deficit Increases
--------------


8. In January, the trade deficit reached R8 billion from
December 2005's surplus of R3.9 billion, as exports
declined by 27% m/m and imports increased by 13.6% m/m.
In December, imports declined by 23.3% and exports
declined by only 2.7%, on a monthly basis. Imports of
original equipment components increased the most, at R1.23
billion, while exports of minerals, base metals and semi
precious and precious stones explained most of the January
decline. The strong rand has boosted imports, along with
a relatively confident business sector, rising incomes and
higher growth. Europe consumes approximately 35% of South
African exports. Weak growth in Europe suppresses South
African export growth. Source: Foreign Trade Alert,
Standard Bank, February 28.

TEITELBAUM