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

181117Z Mar 05

UNCLAS SECTION 01 OF 03 PRETORIA 001160 
 
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 
           March 18 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 of this week's 
 newsletter are: 
 -  Major Revisions for ICT Charter?; 
 -  Secondary Tax Stays; 
 -  Vacant Land Prices Increase More Than Houses; 
 -  Trade and Industry Encourages Co-ops; 
 -  Business Confidence Remains High; and 
 -  South African Household Debt Still Affordable; 
 End Summary. 
 
 MAJOR REVISIONS FOR ICT CHARTER? 
 -------------------------------- 
 
 ¶2.  Business Day reports that after two years of work 
 developing a black economic empowerment charter for the 
 information and communications technology (ICT) sector, a 
 new steering committee is drafting a replacement charter 
 for the sector.  Problems arose because the original ICT 
 working group did not represent 70 percent of the sector, 
 including foreign-based multinationals, cellular 
 operators, broadcasting firm MultiChoice and state-owned 
 enterprises such as Telkom.  The new charter may contain 
 some of the empowerment targets thrashed out in a final 
 draft issued last year by the working groups, but much of 
 the content is likely to be entirely new.  The charter was 
 due to be implemented on March 1, but the final draft was 
 halted during talks with business, government and the 
 National Economic Development and Labor Council (NEDLAC), 
 when Telkom, the cellular operators and MultiChoice 
 refused to sign.  Some of the original participants in the 
 working group are accusing the large corporations of 
 hijacking the process, while the corporations say the 
 initial process was misguided and unrepresentative.  It 
 has also delayed the signing of empowerment deals, as 
 companies wait to see exactly what is required before they 
 bring in black partners.  Analysts suggested that the 
 process was flawed because of the lack of early 
 involvement of large corporations, organized labor and 
 civil society.  According to the article, a steering group 
 representing NEDLAC, telecommunications companies, 
 multinationals, government and the original ICT working 
 group is now drafting a new charter.  Points of contention 
 include:  (1) a dispute over how much equity black 
 investors must own in companies, including the 
 multinationals; (2) the composition of a body to oversee 
 the empowerment process and to score companies on their 
 efforts; and (3) whether broadcasting and 
 telecommunications companies governed by the Independent 
 Communications Authority of SA should abide by the 
 charter, or should follow the authority's stricter 
 empowerment rules.  Source:  Business Day, March 16. 
 
 ¶3.  Comment.  Reaction to the Business Day article was 
 swift, with both Reuters and ITweb publishing refuting 
 accounts later on the same day as Business Day published 
 its article.  Both refuting articles dispute having to 
 scrap the previous two years work on the charter and 
 assert that the charter is still expected to be final by 
 mid-2005.  The Reuters article confirmed strongly the 30 
 percent ownership target, citing Joe Mjwara, the head of 
 the Information, Communication and Technology's steering 
 committee as its primary source.  The ITweb article uses 
 other representatives from the steering committee that 
 confirm delays, but also expect that the charter will be 
 presented to Parliament on time.  End comment. 
 
 SECONDARY TAX STAYS 
 ------------------- 
 
 ¶4.  Finance Minister Trevor Manuel reaffirmed his support 
 of the secondary tax on company dividends, saying it would 
 remain "as long as the African National Congress (ANC) is 
 in government."  Calls for the tax removal, introduced to 
 encourage companies to retain income for investment, were 
 made by various business organizations during 
 parliamentary submissions on the 2005-06 budget proposals. 
 The Democratic Alliance (DA) also called for a phasing out 
 of the tax, saying that government should set a target 
 corporate tax rate of 25 percent over a specified time 
 period.  In his budget speech last month Manuel announced 
 a cut of one percentage point in the corporate tax rate to 
 29 percent.  The result of the lower corporate rate is 
 that the aggregate rate, including the secondary tax on 
 companies on a full-profit distribution, will be 36.89 
 percent compared to the previous rate of 37.78 percent. 
 Figures tabled in Parliament this week by Manuel showed 
 that the corporate income tax bill (excluding the 
 secondary tax) had risen from R15.6 billon in 1995-96 to 
 R60 billion in 2003-04.  Source:  Business Day, March 16. 
 
 VACANT LAND PRICES INCREASE MORE THAN HOUSES 
 -------------------------------------------- 
 
 ¶5.  The price of vacant land is growing faster than that 
 of houses in some areas, a trend that could make housing 
 within city limits unaffordable for many.  A recent study 
 by property economists and assessors Rode & Associates on 
 Cape Town's Atlantic seaboard showed that the price of 
 serviced vacant land grew at a compound rate of 70 percent 
 a year between July 2001 and January 2005, while house 
 prices in the same area grew by 37 percent and Rode's 
 house price index for upper-priced homes in Cape Town grew 
 by 29 percent a year.  Rode said he suspected that similar 
 trends were found in other metropolitan areas.  Jacques du 
 Toit, a senior economist at ABSA bank, said indications 
 were that prices of vacant stands in major cities were 
 growing faster than prices of houses, saying that the 
 scarcity of serviced stands (lots of vacant land having 
 access to utilities) was becoming a structural rather than 
 a cyclical phenomenon.  The property boom has resulted in 
 demand for land far outstripping supply, creating a sharp 
 upsurge in land prices.  Combined with inefficiencies in 
 delivery of infrastructure, this has created a long lag 
 time for land to be subdivided and serviced.  In addition, 
 other infrastructure constraints, such as traffic 
 congestion and the absence of an adequate public transport 
 system, as well as increasing urbanization, added to the 
 demand for residential properties in metropolitan areas. 
 Source:  Business Report, March 16. 
 
 TRADE AND INDUSTRY ENCOURAGES CO-OPS 
 ------------------------------------ 
 
 ¶6.  Trade and Industry Minister Mandisi Mpahlwa announced 
 the Department's plan to encourage the formation of co- 
 operatives as part of government's job creation strategy. 
 According to Department spokesman Bongani Lukhele, co- 
 operatives are small enterprises that differ from other 
 small enterprise since all participants are equal 
 shareholders.  Co-operatives have historically been 
 popular in South Africa especially in the agricultural 
 sector.  Lukhele cited stokvels (a savings group) as 
 another example of a co-operative where people join having 
 a common interest.  The Department of Trade and Industry 
 established a Co-operatives Unit, looking to start 
 training in co-operative principles and practices, as 
 emphasized by the 2003 Growth and Development Summit. 
 Source:  Sapa, March 16. 
 
 BUSINESS CONFIDENCE REMAINS HIGH 
 -------------------------------- 
 
 ¶7.  The latest University of Stellenbosch's Bureau of 
 Economic Research business confidence survey shows 
 business confidence high during the first quarter 2005 at 
 79, although below the 24-year peak level of 88 shown in 
 the last quarter of 2004.  A value over 50 indicates 
 optimism while below 50 signifies pessimism about business 
 conditions.  The survey contacts 3,000 respondents in the 
 retail, wholesale, motor trade, manufacturing, and 
 building and construction sectors of the economy.  The 
 survey was conducted between February 16 and March 10, 
 soon after the South African Reserve Bank decided to leave 
 interest rates unchanged and during the period when gas 
 prices increased by 42 rand cents per liter.  Business 
 confidence remained strong due to strong consumer demand; 
 although Rudolf Gouws, chief economist of Rand Merchant 
 Bank, suggests that the dip in confidence suggested a 
 slower increase in domestic expenditure in 2005.  Source: 
 Business Day, March 17. 
 
 SOUTH AFRICAN HOUSEHOLD DEBT STILL AFFORDABLE 
 --------------------------------------------- 
 
 ¶7.  According to a Standard Bank study, South African 
 household debt is increasing, but consumers have been able 
 to finance increased debt through credit.  Credit has been 
 available due to a combination of low interest rates and 
 rising disposable income.  Debt as a proportion of 
 household disposable income was 55.4 percent in third 
 quarter 2004 compared to 51.4 percent one year earlier. 
 While South Africa's debt levels are increasing, they are 
 low when compared to levels in countries such as the 
 United Kingdom, Japan, and Canada, all of which have 
 household debt to income ratios of over 120 percent. 
 There is no universal threshold for the national debt to 
 income ratio at which household indebtedness becomes 
 unsustainable, although South Africa's low inflation and 
 interest rates suggest that its financing of its debt can 
 continue.  Source:  Business Report and Business Day, 
 March 17. 
 
FRAZER