This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PRETORIA 000869 
 
SIPDIS 
 
DEPT FOR AF/S/JDIFFILY; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR OAISA/BARBER/WALKER/JEWELL 
USTR FOR COLEMAN 
LONDON FOR GURNEY; PARIS FOR NEARY 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT:  SOUTH AFRICA ECONOMIC NEWSLETTER 
          February 25 2005 ISSUE 
 
 
¶1. SUMMARY.  Each week, AMEmbassy 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 in the February 25 
newsletter include: 
 
- 2005 Budget aims to sustain faster growth 
- Public sector capex to increase to 18 percent 
- Social security grants increase for poor and disabled 
- Tax relief for small businesses 
- Leading economic indicator falls 
- CPIX inflation hits record low 
- 1.4 percent PPI raises hopes of interest rate cut 
- AIDS increases South Africa deaths by 57 percent 
END SUMMARY. 
 
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2005 BUDGET AIMS TO SUSTAIN FASTER GROWTH 
----------------------------------------- 
 
¶2.  Finance Minister Trevor Manuel unveiled a 2005 budget 
aimed at sustaining faster economic growth while curbing 
budget deficits.  Gross domestic product (GDP) growth for 
2005 was revised up to 4.3 percent from 3.9 percent 
previously.  The economy expanded by 3.7 percent in 2004 - 
its fastest pace since 2000, when it grew by 4.3 percent. 
Higher revenues from value-added and income taxes helped 
boost government income more than R11 billion ($1.9 billion) 
above previous estimates, allowing Manuel to cut the 
corporate tax rate to 29 percent from 30 percent and hand 
back R6.8 billion ($1.2 billion) in personal tax relief for 
the 2005/06 fiscal year, beginning in April.  The government 
plans to spend R180 billion ($31 billion) on infrastructure 
- ports, rail, power stations and dams - over the coming 
five years.  Growth was expected to average 3.8 percent in 
2006, quickening to 4.4 percent in 2007. This growth 
compares to predictions of 3.7 percent and 4.2 percent 
respectively last October.  The stronger economy helped 
South Africa to sharply cut its budget deficit estimate for 
fiscal 2004/05 to 2.3 percent of gross domestic product 
(GDP), sharply below the 3.2 percent estimated in November's 
medium term budget policy statement.  The Treasury said 
although the rand had taken a toll on the manufacturing and 
mining sectors, it had also suppressed inflation pressures, 
which meant the targeted CPIX measure was expected to remain 
inside the 3 percent-6 percent band well into 2007. 
(Reuters, February 24) 
 
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PUBLIC SECTOR CAPEX TO INCREASE TO 18 PERCENT 
--------------------------------------------- 
 
¶3.  South Africa's public sector capital expenditure (capex) 
is expected to grow at an average of 18.8 percent over the 
year-year period covered by the 2005 Medium Term Expenditure 
Framework (MTEF) up from an average of 11.7 percent a year 
between 2001/02 and 2004/05, according to National 
Treasury's Budget Review.  Increased public spending of 
R27.3 billion ($4.7 billion) will be for Municipal and 
Provincial Infrastructure Grants to accelerate the 
eradication of apartheid era backlogs in township roads, 
water, sanitation, street lighting, community centers, 
provincial roads, schools, and clinics, and to increase 
employment through labor intensive construction methods via 
the Expanded Public Works Program.  An additional R5 billion 
($862 million) will be provided to the housing budget and 
Community Infrastructure and an extra R4.35 billion ($750 
million) will be allocated for roads, rail, and 
transportation upgrades for the 2010 World Cup.  Other large 
infrastructure budgets include R4.3 billion ($741 million) 
for the hospital revitalization program, R3.3 billion ($569 
million) for the national Public Works program, and R5.8 
billion ($1 billion) for prison facilities, police stations, 
and court facilities.  Transnet, the state-owned transport 
utility, plans to spend about R30 billion ($5.2 billion) on 
ports, freight rolling stock, rail, and fuel pipelines. 
Eskom's, the state-owned power utility, infrastructure plans 
amount to R56 billion ($9.7 billion) and include investments 
in power generation, transmission, and distribution.  Total 
capital expenditure by non-financial public enterprises is 
estimated to be about R115 billion ($19.8 billion) over the 
MTEF.  (I-Net, February 24) 
 
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SOCIAL SECURITY GRANTS INCREASE FOR POOR AND DISABLED 
--------------------------------------------- -------- 
 
¶4.  Finance Minister Trevor Manuel announced social security 
grant increases for the poor, disabled, and vulnerable 
children.  As of April this year, qualified individuals will 
receive an additional R40 ($6.89) to their grants, totaling 
R780 ($134.48) a month.  Manuel said the foster care grant 
would increase by R30 ($5.17) to R560 ($96.55) while the 
child support grant has been increased to R180 ($31) a 
month.  Although the increases would have a major impact on 
the income security of the most vulnerable, particularly in 
support of children under the age of 14, Manuel also noted 
that the expansion of the grants carried costs.  "Of the R74 
billion ($12.76 billion) in additional allocations over the 
MTEF, a total of 30 percent is added to the social grant 
programs, bringing aggregate social security spending to 
R55.4 billion ($9.55 billion) next year and 12.7 percent of 
consolidated spending by 2007/08," he explained.  He added 
the increase in social spending was due to the strength of 
the economy and tax collection that had seen the treasury 
projecting to raise R11 billion ($1.9 billion) more this 
year than budgeted.  (BuaNews, February 23) 
 
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TAX RELIEF FOR SMALL BUSINESSES 
------------------------------- 
 
¶5.  In a bid to stimulate the economy and create jobs by 
developing small businesses, Government announced tax relief 
of R1.4 billion for small companies, effective April 1. 
Finance Minister Trevor Manuel said the new tax regime will 
cover small business corporations (SBC), provided they 
maintain at least four full-time employees for core 
operations.  To qualify as a SBC, Government has increased 
the turnover limit for eligible companies from R5 million 
($862k) to R6 million ($1.03 million).  The tax relief means 
that a SBC with a taxable income of R400,000 ($68,965) could 
save from R32,500 ($5603) to R55,000 ($9483) in income tax. 
The tax rate of small companies in other sectors including 
close corporations will be reduced from 30 percent to 29 
percent.  The South African Revenue Services (SARS) will 
also lend a hand to small businesses to be compliant of 
their tax returns, by deploying "tax helpers" to areas where 
small businesses are situated to help with tax registration, 
returns and business tax obligations.  SARS has dedicated a 
help desk solely for small business inquiries about tax 
compliance.  (BuaNews, February 23) 
 
-------------------------------- 
LEADING ECONOMIC INDICATOR FALLS 
-------------------------------- 
 
¶6.  South Africa's December 2004 leading economic indicator, 
which is compiled by the South African Reserve Bank (SARB), 
fell by 0.9 percent month-on-month (m/m), its steepest 
monthly decline since May 2003.  This decrease pushed the 
year-on-year (y/y) increase down to 7.7 percent, its first 
fall into single-digits since February 2004, from 10.8 
percent in November.  For the year as a whole, the leading 
indicator rose by 10.6 percent in 2004 after a 7.0 percent 
decline in 2003.  Of the 13 components in December 2004, 
only one - job advertisements - had a positive impact, four 
were unavailable and eight were negative.  The negative 
factors were average manufacturing hours worked, 
manufacturing orders, building plans approved, the interest 
rate spread between the money market and capital market 
instruments, equity prices, real M1 money supply, the 
commodity price index and the leading indicator of major 
developed countries.  The unavailable data was for labor 
productivity, business confidence, the inventory/sales ratio 
and the gross operating surplus as a percentage of GDP.  The 
South African economy is currently in a record upturn, as 
the current upturn started in September 1999. The previous 
record upturn was from September 1961 to April 1965.  (I- 
Net, February 18) 
 
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CPIX INFLATION HITS RECORD LOW 
------------------------------ 
 
¶7.  The targeted CPIX inflation rate slowed to a record low 
of 3.6 percent in the year to January as expected, versus 
4.3 percent the previous month.  Figures from Statistics 
South Africa also showed the all-items consumer price index 
(CPI) rose by an annual rate of 3 percent during the month 
versus 3.4 percent in December.  On a monthly basis, CPIX 
rose 0.5 percent while CPI rose 0.3 percent.  Both fell by 
0.2 percent in December.  It was the 17th straight month 
that the CPIX measure - which strips out the impact of 
volatile home loans - was inside the government's 3-6 
percent target range.  Moderating medical costs, a cut in 
fuel prices and slowing food inflation were the main factors 
behind the number.  But the biggest long-term trend behind 
subsiding inflation is the rand, which has chalked up three 
straight years of huge gains against the dollar.  Figures 
from Statistics South Africa also showed the all-items 
consumer price index (CPI) rose by an annual rate of 3 
percent during the month versus 3.4 percent in December.  On 
a monthly basis, CPIX rose 0.5 percent while CPI rose 0.3 
percent. Both fell by 0.2 percent in December.  (Reuters, 
February 25) 
 
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1.4 PERCENT PPI RAISES HOPES OF INTEREST RATE CUT 
--------------------------------------------- ---- 
 
¶8.  Producer price inflation slowed dramatically in the year 
to January, coming in well below forecasts, sending bond 
yields to their best ever levels and reinforcing market 
expectations of an April rate cut.  The producer price index 
(PPI) rose by 1.4 percent in the year to January, better 
than December's 1.9 percent rise and well below a consensus 
forecast of a 2 percent rise.  Statistics SA said sharply 
slower increases on petroleum and coal were the main factors 
behind the improvement.  Expectations of a rate cut were 
boosted on Wednesday when Stats SA said the targeted CPIX 
consumer inflation measure had slowed to a record low of 3.6 
percent.  The bond market reacted by extending its rally, 
with the yield on the key R153 ($26.38) bond strengthening 
more than 8 basis points to a new best of 7.43 percent. 
(Business Report, February 25) 
 
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AIDS INCREASES SOUTH AFRICA DEATHS BY 57 PERCENT 
--------------------------------------------- --- 
 
¶9.  South Africa's death rate jumped 57 percent between 1997 
and 2003 with HIV/AIDS emerging as one of the main causes of 
death in the 15 to 49 age bracket, according to a study by 
Statistics SA.  Chief statistician Pali Lehohla said that 
data from about three million death certificates issued 
between 1997 and 2003 "provide indirect evidence that the 
HIV epidemic in South Africa is raising the mortality levels 
of prime aged adults in that associated diseases are on the 
increase."  According to the report, tuberculosis killed 
37,917 people aged between 15 and 49 in 2001 while HIV/AIDS 
claimed 7,564.  Tuberculosis, influenza and pneumonia are 
frequently opportunistic infections associated with 
HIV/AIDS.  South Africa has the highest HIV/AIDS caseload in 
the world with 5.3 million people, or one in five adults, 
living with HIV and AIDS, according to UN figures.  The 
British medical journal The Lancet this month cited 
estimates from the South African Medical Research Council 
showing that the number of deaths linked to HIV/AIDS was 
likely to be three times as much as the one in the 
government statistical report.  The release of the latest 
statistics on the causes of death came a week after 
President Thabo Mbeki declared in his state of the nation 
address that his government's plan to fight AIDS was "the 
best in the world."  (AFP, February 18) 
 
FRAZER