SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER JANUARY 19,

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SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER JANUARY 19,
2007 ISSUE


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1. (U) Summary. This is Volume 7, issue 03 of U.S. Embassy
Pretoria's South Africa Economic News weekly newsletter.

Topics of this week's newsletter are:
- Growth Lifts Business Mood to Record High
- Domestic Steel Sets New Records
- Infrastructure Not Keeping Pace
- SA Granted a R8.4bn Loan
- Manufacturing Output up 5.4%
- Group to Fund Cheap SA Housing
- SA Economy '64% Free'
- Gold Propels JSE to Near Record Peak
End Summary.

Growth Lifts Business Mood to Record High
--------------

2. (U) Confidence in the South African economy climbed to a record
high in December, due to optimism about SA's growth prospects. The
South African Chamber of Business (SACOB) Business Confidence Index
rose to a record high of 103.5 in December 2006, while the Reuters
Econometer, a measure of economic confidence, climbed to its highest
level since May 2006, at 263.74. Analysts said the outlook for
economic growth remained positive, as infrastructure spending is
expected to rise in the run up to the 2010 world Cup. Economists
forecast growth of 4.3% for 2007 and 4.6% for 2008. Lower oil
prices should restrain inflation, and analysts project that CPIX
inflation (consumer price index excluding mortgage costs) will be
5.3% in 2007 and 4.8% in 2008. On the other hand, the current
account deficit and higher interest rates remain worrisome. The
current account deficit rose to a record high of 6.1% of GDP in the
first quarter of 2006, after which it narrowed to 5.2% in the third
quarter. (Business Day, January 12)

Domestic Steel Sets New Records
--------------


3. (U) South Africa's five steel producers dispatched 5.3 million
tons of primary carbon steel products to the domestic market during

2006. This was the highest total on record and is 26% higher than
the 4.2 million tons delivered to the domestic market in 2005.
Imports of primary steel products into SA increased to 456,000 tons
for the first ten months of 2006, giving an annualized figure of
540,000 tons for the full year. This represents an increase of more
than 60% over the 336,000 tons for 2005. This is the highest level
of imports for 30 years. Based on these projections, domestic
consumption of steel should total about 5.8 million tons for 2006.
This is an increase of 27% over the 4.6 million tons consumed in
2005 and 10% higher than the previous record of 5.3 million tons in

1981. The record demand for steel, cement and other construction
materials is indicative of the economic and construction boom that
the country is experiencing.

Infrastructure Not Keeping Pace
--------------


4. (U) Speaking on South African Broadcast Corporation (SABC)
television on January 15, President Thabo Mbeki said that
infrastructure in South Africa has not kept pace with economic
growth. "For example, we thought we had spare capacity, but now we
have a shortage of electricity supply as it did not keep up with the
demand," Mbeki said, promising that the government would invest more
money in roads, ports, railways and electricity supply to keep up
with economic growth. "It is a problem, but it is a good problem,"
he said. According to the President, the private sector would also
be encouraged to become involved. Mbeki acknowledged that local
governments had great difficulty making capital investments in
infrastructure. "We can have good national strategies and plans and
even the money, but if local government doesn't implement these, it
doesn't work," he said. He explained that the SAG is dealing with
the problem by calling experts out of retirement and looking abroad
to recruit people with the necessary skills to implement the
government's plans and strategies. (Business Day, January 16)

SA Granted a R8.4bn Loan
--------------


5. (U) The European Investment Bank (EIB),the development bank of
the European Union, will lend South Africa 900 million ($1.2
billion) for public infrastructure projects and private sector

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investment over the next seven years. "The use of the 900million
will be focused on infrastructure projects of public interest -
power, water supply, sewerage and communications - and support for
private sector investment, with substantial development values
including small- and medium-scale investments," the EIB said in a
statement. The loan agreement with South Africa covers the period
2007 to 2013. The EIB also said it would grant power utility Eskom
a loan of up to 300 million ($390 million) to help improve power
transmission lines from power stations in the north of the country
to the Western Cape province, which has suffered chronic electricity
outages. The loan to Eskom will be repayable over 25 years. Under
past agreements, the bank has loaned South Africa 1.5 billion ($2
billion). The EIB uses its top-notch credit rating to borrow funds
on capital markets at low rates and best terms, which are then
passed on to recipients on a cost-recovery basis. (News 24,
January)

Manufacturing Output up 5.4%
--------------


6. (U) Growth in manufacturing production slowed by 5.4% in November
after growing 7.7% in October, as higher interest rates and a
relatively stronger rand put the brakes on growth in some sectors.
The South African Reserve Bank (SARB),which has hiked interest
rates by 200 basis points so far in the current cycle, is expected
by some analysts to hike them another 50 basis points next month.
Higher interest rates are expected to have a slightly negative
effect on manufacturers supplying the retail sector, analysts said.
The manufacturing sector, which has in the recent past struggled to
survive as the rand strengthened to about R6 to the dollar, could
get some relief from a weaker rand in 2007. The rand weakened about
9% against the dollar in 2006 and 4% so far this year. Analysts
believe that the Reserve Bank will leave interest rates unchanged
once the rand settles above R7 to the dollar and the inflation
outlook improves. If this happens, growth in the manufacturing
sector should firm in 2007. The manufacturing sector is the
economy's second-largest sector, accounting for just more than 16%
of gross domestic product. (Business Day & News 24, January 12)

Group to Fund Cheap SA Housing
--------------


7. (U) International Housing Solutions (IHS),an international joint
venture between MuniMae of the U.S. and Irish property group Howard
Eurocape, has expanded its operations to the African continent, with
its head office for Africa to be situated in Johannesburg. With
extensive experience financing affordable housing around the world,
IHS aims to bring foreign capital and expertise to South Africa to
boost the supply of affordable housing for low and moderate income
families. Elize Stroebel, who will head the South African
operations, said IHS has conducted extensive research into the South
African market. "Figures from the SA Banking Association show a
growing demand for housing which local financial institutions and
developers are unable to meet, causing the current housing deficit
to grow by about 180,000 units each year," Strobel said, adding,
"Short-term finance has proved to be a major stumbling block in the
construction of more of these houses.". Initially, IHS aims to help
finance homes for households earning between R3 500 ($480) and R8
200 ($1,120) per month. Although the government has subsidized the
construction of some 2.2 million homes in SA since 1994, a further
2.4 million homes are needed, according to an October 2006 report
from the National Treasury. (Inet-Bridge, January 15)

SA Economy '64% Free'
--------------


8. (U) According to the Heritage Foundation's Index of Economic
Freedom, South Africa ranks 52nd among 157 ranked countries with a
score of 64.1 points (64.1% free). That makes the economy
"moderately free." The index ranks each economy according to the
level of government intervention, trade and monetary policy,
property rights and regulations, as well as labor freedom. South
Africa is ranked 3rd out of 40 countries in the sub-Saharan Africa
region (Mauritius and Botswana are rated ahead of South Africa).
The report lauded South Africa's financial system as the most
developed in Africa. It also said the country maintained fairly high
levels of business freedom, fiscal freedom, monetary freedom and
freedom from government intervention. Inflation is low and tax
revenue as a percentage of GDP is moderate. Starting a business in

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South Africa takes an average of 35 days, compared with the world
average of 48 days. The report points out that South Africa can
improve investment freedom, property rights, and freedom from
corruption. It also said the judicial system is slow, primarily
because of understaffing and inefficiency, and that black economic
empowerment laws and unclear regulation are hampering foreign
investment. Hong Kong is the world's freest economy for a 13th
successive year, scoring 89.3 points on the index. (News 24, January
17)

Gold Propels JSE to Near Record Peak
--------------


9. (U) The Johannesburg Stock Exchange (JSE) raced to near-record
highs on January 15, closing at [what did it close at?] few points
below its best level yet, as a slight recovery in precious metals
prices buoyed the local bourse. The gold index was up more than 2%
and the market jumped to a close of 25,194 on January 15, just shy
of the record 25,208 reached two weeks ago. Gold climbed to its
highest level in nearly two weeks as a wobbly dollar elevated the
precious metal's appeal as an alternative investment tool. (Business
Day, January 16).

BOST