SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER MAY 18, 2007

UNCLAS SECTION 01 OF 03 PRETORIA 001805 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 ENRG BEXP KTDB SENV PGOV, SF SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER MAY 18, 2007 ISSUE PRETORIA 00001805 001.2 OF 003 ¶1. (U) Summary. This is Volume 7, issue 20 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - R15 Billion Trade Deficit in First Quarter - 2010 to Boost GDP by R51.1 billion - Changes to Tax Return System - Rates Hit Manufacturing Growth - More SA Workers Stressed, Depressed - South African Airways Bailed Out - South Africa's Top CO2 Emitters Engaged in Carbon Disclosure Program End Summary. R15 Billion Trade Deficit in First Quarter -------------- ¶2. (U) South African Revenue Service (SARS) data recorded a R15 billion ($2.1 billion) trade deficit in the first quarter of 2007, due to rising imports of capital goods and increasing oil imports. Imports surged from R92.4 billion ($13.2 billion) in the first quarter of 2006 to R127.7 billion ($18.2 billion) during the same period this year. Higher imports were mainly due to the importation of machinery and mechanical appliances, oil, cement, steel and vehicles. The value of exports improved from R77.7 billion ($11.1 billion) in the first quarter of 2006 to R112.7 billion ($16.1 billion) during the first quarter of 2007, largely due to rand weakness and robust global demand for resources. Economists believe South Africa's export growth will remain strong during 2007 on the back of ongoing robust global demand for resources, improved production efficiencies in the mining sector, and rand weakness. South Africa's demand for both imported capital and consumer goods is expected to remain robust, the former due to ongoing vigorous capital formation. Strong foreign demand for South Africa's assets has provided ample capital inflows to finance the current account deficit, but poses a risk to South Africa should these flows dry up. (Investec, May 9, 2007) 2010 to Boost GDP by R51.1 billion -------------- ¶3. (U) According to a 2010 Soccer World Cup economic impact assessment study by Grant Thornton, the World Cup will contribute at least R51.1 billion to gross domestic product (GDP) between 2006 and 2010, R21 billion ($3 billion) more than estimated during the bidding phase of the World Cup in 2003. Of this revised amount, R17.7 billion ($2.5 billion) comes from higher-than-planned infrastructure spending, particularly transport infrastructure. Also, 500,000 more tickets will be available for soccer supporters, adding to the number of tourists expected to visit South Africa during this period. (Fin24, May 14, 2007) Changes to Tax Return System -------------- ¶4. (U) Finance Minister Trevor Manuel announced changes to South Africa's tax return system, making it easier for individuals and businesses to file returns. However, industry experts warn the changes threaten the livelihoods of about 17,000 tax practitioners and advisers registered with the South African Revenue Service (SARS),as taxpayers would now be able to fill out their own tax returns. Under the new system, tax assessment forms have been reduced from 10 pages to just two and taxpayers would not have to submit supporting documentation or make calculations. The new self-assessment system put the onus on the taxpayer to ensure that amounts disclosed in the return are correct and that supporting documents are kept for five years. Furthermore, the deadline for personal tax submissions has been pushed back from mid-July to October 31. SARS intends to ensure greater efficiency and faster turnaround times verifying and assessing the information submitted by taxpayers. Manuel said the number of returns that needed to be assessed each year had reached unprecedented volumes, and would continue to grow at about 8% per year over the next three to five years. There are currently 7 million registered taxpayers in South Africa, of which there are 5 million individuals, 1.7 million companies, and 300,000 trusts. SARS is also in the process of simplifying tax returns for companies, trusts and tax exempt institutions. (News24, May 10, 2007) PRETORIA 00001805 002.2 OF 003 Rates Hit Manufacturing Growth -------------- ¶5. (U) According to Statistics South Africa (StatsSA),manufacturing output growth slowed from 7.2% year-on-year in February 2007 to 5.2% in March 2007, adding to evidence of weaker domestic demand and backing the case for interest rates to remain steady this year. The South African Reserve Bank (SARB) raised interest rates by two percentage points in the second half of last year to curb inflationary pressures fanned by rapid growth in credit demand and consumer consumption, along with rising food and fuel costs. Since then, growth in retail sales, private sector credit and vehicle purchases has subsided, suggesting higher interest rates are having an effect on the demand side of the economy. Also, expected slower global growth and rand gains are likely to keep the trend in place by dampening appetite for South African exports. That does not bode well for the manufacturing sector, which accounts for more than 17% of the economy and is seen as crucial to sustaining economic growth and job creation. (Business Day, May 11, 2007) More SA Workers Stressed, Depressed -------------- ¶6. (U) According to a study by Corporate Absenteeism Management Solutions (CAMS),increasing numbers of South Africans are taking sick leave because of psychological illness, costing companies more than R1 billion ($140 million) a year. About R19 billion ($2.7 billion) was lost due to sick absenteeism in South Africa in 2006, of which R1.2 billion ($17 million) was due to psychological reasons. CAMS studied a sample of more than 100,000 employees in more than 60 companies, and examined the medical certificates presented by employees after returning from sick leave. It found that between March 2005 and the beginning of March 2006, 45 out of every 1,000 employees took time off for psychological reasons. This had risen to 65 out of every 1,000 employees between March 2006 and March 2007. Psychological illness includes depression and absenteeism due to stress. The average number of days per year an employee was ill for psychological reasons was 4.6 days, double the time the average employee takes off for other illnesses. The statistics may reflect the impact of high crime levels, socio-economic problems, and transformation in the workplace on the South African workforce. (Business Day, May 15, 2007) South African Airways Bailed Out -------------- ¶7. (U) Parliament has agreed to provide financially troubled South African Airways (SAA) with a R1.3 billion ($188 million) guarantee to fund recapitalization and restructuring. The state-owned airline had asked for R4 billion ($580 million) but Parliament's public enterprise committee balked, saying that the various restructuring plans submitted by SAA over the past two years were "troubling." Public Enterprise Minister Alec Erwin said that a two-year deadline had been set for restructuring and cost-cutting. Erwin said this would involve simplifying the corporate structure, improving accountability and disposing non-core assets. Erwin warned that up to 1,000 of SAA's 11,000 jobs could be lost in the process. (Business Day, May 4, 2007) South Africa's Top CO2 Emitters Engaged in Carbon Disclosure Program -------------- Q -------------- --- ¶8. (U) Leading South African companies are to participate in a carbon disclosure program (CDP) scheduled to run until the end of May 2007. CDP is a survey launched in the UK in 2000 and designed to determine the impact of business on the environment. According to the CDP survey, many companies contribute to climate change through greenhouse gases emitted during their different working processes. Growing fear of the potential impact of climate change on the global economy and people's livelihoods is increasingly forcing nations to develop mitigation and adaptation mechanisms against climate change. World markets are also intensifying demand for products manufactured and harvested in environmentally sustainable ways, while customers and consumers frown upon products manufactured through carbon-intensive processes. South Africa is one of the countries beginning to feel the pressure of these new developments. South African coal companies find it more difficult to penetrate European coal markets, as authorities in those PRETORIA 00001805 003.2 OF 003 countries believe that coal imported from South Africa, relative to other import sources, tends to be high in oxide and carbon dioxide emissions when burned. The EU's Large Combustion Plant Directive is to start limiting nitrogen oxides and sulphur dioxide emissions which may pose significant problems for South African coal exports. South African carbon dioxide (CO2) production is reported to have been on the increase from 1980 to 2004, making it higher than Brazil with four times South Africa's production. The World Resource Institute estimated South Africa's CO2 production at 417 million tons for 2000, making South Africa the world's 19th largest emitter of the gas. The initial CDP survey involved only FT 500 companies, while the current survey is the first to include developing countries like Brazil, India and South Africa. South Africa's top emitters, ESKOM and SASOL, are expected to participate in the survey. (Business Day and Business Report, May 14, 2007) BOST