VZCZCXRO3552
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #0722/01 0521240
ZNR UUUUU ZZH
R 211240Z FEB 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 1711
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 PRETORIA 000722 
 
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 FEBRUARY 17 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: 
 
 -  Lowest Budget Deficit in 25 Years, Growth May be Above 
 5%; 
 -  Tax Relief Aimed At Individuals; 
 -  Corporate Tax Changes; 
 -  Increased Government Expenditures on Social Services and 
 Infrastructure; 
 -  South Africa Eases Foreign Exchange Controls on 
 Individuals; and 
 -  High Voter Turnout Predicted by IEC 
 End Summary. 
 
 Lowest Budget Deficit in 25 Years, Growth May be Above 5% 
 --------------------------------------------- ------------ 
 
 ¶2.  A strong economy and improved tax collection gave 
 South Africa its lowest budget deficit in 25 years after 
 tax revenues increased by more than 18% in 2005.  The 
 National Treasury estimated 2005/06 budget deficit had 
 been revised down to 0.5% of GDP compared to an October 
 2005 estimate of 1% and a February 2005 estimate of 3.1%. 
 That would be the lowest budget deficit since 1981's 
 deficit/GDP of 0.4%.  Strong economic growth meant the 
 government collected R41.2 billion ($6.9 billion, using 6 
 rands per dollar) more revenue in the 2005/06 fiscal year 
 (ending on March 31), than it had estimated in the 
 February 2005 budget.  The government also forecast 
 smaller deficit/GDP ratios for each of the next three 
 years even as it increases its expenditure growth.  South 
 Africa's budget deficit was estimated at 1.5% of GDP in 
 fiscal 2006/07, easing slightly to 1.4% in 2007/08 and 
 reaching 1.2% 2008/09.  These revised estimates compare to 
 previous forecasts of 2.2% of GDP in fiscal 2006/07, 2.1% 
 in 2007/08 and 2% in 2008/09, made last February.  The 
 Treasury also lowered its forecast for public sector 
 borrowing to 0.6% of GDP in fiscal 2005/06 and an average 
 of 2.4 percent over the next three years.  Last February, 
 Treasury estimated public sector borrowing at an average 
 of 3.5% between 2006 and 2008.    Treasury expects South 
 African growth of 5% in 2005, up from 4.5% in 2004, and 
 the highest growth since 1984.  Source:  Reuters and 
 Nedbank's Budget 2006, February 15; Business Day and 
 Business Report February 16. 
 
 Tax Relief Aimed at Individuals 
 ------------------------------- 
 
 ¶3.  In his budget speech, Finance Minister Trevor Manuel 
 announced tax cuts for individuals, small businesses and 
 retirement savings, but left the corporate tax rate 
 unchanged at 29%.  Personal taxes were cut by R13.5 
 billion ($2.3 billion) with 73% of the reductions focused 
 on individuals earning R250,000 ($42,000) or less.  The 
 top tax bracket at which the 40% marginal rate applies 
 will increase to R400,000 ($67,000) from R300,000 
 ($50,000), while the tax threshold at which employees 
 begin paying tax increases to R40,000 ($6,700) from 
 R35,000 ($5,800), beginning in April.  The tax on 
 retirement savings was reduced by half to 9% starting 
 March 1 in order to boost South Africa's low savings rate. 
 Taxes on property were reduced with the lower limit of 
 property value being subject to taxes increased to 
 R500,000 ($83,000) compared to the previous threshold of 
 R190,000 ($32,000).  Since 1996, there has been more than 
 R80 billion ($13 billion) in personal income tax 
 reductions, mainly aimed at lower and middle income 
 groups.  The only tax increases apply to alcohol and 
 tobacco which will increase between 9% and 20% and between 
 5 and 10%, respectively.  Source:  Business Day and 
 Business Report, February 16. 
 
 Corporate Tax Changes 
 --------------------- 
 
 ¶4.  The Finance Minister also increased the pool of firms 
 eligible for small business loans.  Small businesses are 
 now defined as having annual revenues of R14 million ($2.3 
 million) compared to last year's definition of R6 million 
 ($1 million).  Manuel also announced that the income 
 
PRETORIA 00000722  002 OF 003 
 
 
 threshold for the lower 10% corporate tax rate would 
 increase to R300,000 ($50,000) from R250,000 ($42,000) in 
 ¶2005.  Industry analysts had expected the Minister to 
 reduce the top corporate tax rate, currently at 29%, or 
 the secondary tax on companies, at 12.5%, but neither 
 happened.  The regional services taxes, payable to 
 municipalities, were abolished amounting to a tax 
 reduction of R7 billion.  The Minister made no 
 announcement on the tax's replacement.  The Treasury also 
 raised thresholds for capital gains tax to account for 
 inflation.  Source:  Reuters and Nedbank, February 15. 
 
 Increased Government Expenditures on Social Services and 
 Infrastructure 
 --------------------------------------------- ---------- 
 
 ¶5.  Spending on social services remains the key priority 
 over the next three years, accounting for 53% of total 
 spending in 2006/07 and increasing 12% per year.  An 
 additional R34 billion ($5.7 billion) is planned for 
 infrastructure spending over the 2006-2009 Medium Term 
 Expenditure Framework.  All government expenditures during 
 2005/06 fiscal year increased by 13.7%, higher than the 
 12.9% planned in the February 2005 National Budget and the 
 12.8% increase posited in October 2005 Mid Term Budget 
 Policy Statement.  In 2006/07 expenditure should increase 
 12.8% with an annual average of 10.9% over the next three 
 years.  As a percentage of GDP, expenditures will increase 
 from 26.9% in 2005/06 to 27.6% for the next year and 
 easing to 27.3% by 2008/09.  Social security grants will 
 increase by a total of R80.6 billion ($13 billion). 
 Disability and old age grants rise to R820 ($137) per 
 month, an increase of R40.  The foster care grant is now 
 R590 ($98) per month, an increase of R30.  Finally, the 
 child support grant (reaching children up to the age of 
 14) increases by R10 to reach R190 ($32) per month. 
 Expansions in the commuter rail network, water and road 
 infrastructure will increase infrastructure spending 
 sharply as South Africa prepares for the 2010 World Cup 
 and implements the Accelerated and Shared Growth 
 Initiative.  Source:  The Star, Business Report, February 
 16; Nedbank February 15. 
 
 South Africa Eases Foreign Exchange Controls on 
 Individuals 
 --------------------------------------------- -- 
 
 ¶6.  Finance Minister Manuel announced another easing of 
 foreign exchange restrictions on individuals.  Individuals 
 may now transfer up to R2 million ($330,000) offshore a 
 year, up from the previous limit of R750,000 ($125,000). 
 To promote investment in other African countries, 
 companies will no longer have to own a majority stake in a 
 foreign firm to invest elsewhere on the continent.  The 
 present foreign direct investment threshold of 50 percent 
 will be lowered to 25 percent for investments by South 
 African corporations and parastatals.  Manuel said the 
 government's foreign exchange control amnesty had raised 
 R2.9 billion ($480,000) in fees and R1.4 billion 
 ($200,000) in taxes from money previously parked illegally 
 offshore.  Manuel identified total assets of R68.6 billion 
 ($11 billion) from 42,672 applications for amnesty and 
 announced the completion of the amnesty program announced 
 in February 2003.  The Treasury said 42,184 amnesty 
 applications were approved, 924 were withdrawn and only 20 
 applications were declined, with approximately 70% of the 
 disclosed assets illegal.  The revenue raised through 
 amnesty fees will be used in public-private partnership 
 investments in community infrastructure and business 
 development in low income areas.  Source:  Reuters, 
 February 15; Budget Speech 2006, February 15. 
 
 High Voter Turnout Predicted by IEC 
 ----------------------------------- 
 
 ¶7.  According to a survey sponsored by the Independent 
 Electoral Commission (IEC), 80% of registered South 
 Africans plan to vote in the upcoming municipal election 
 on March 1.  Other polls have predicted that voter turnout 
 could be as low as 40% compared to an average of 48% 
 turnout in the past two local elections.  The Human 
 Sciences Research Council conducted the survey of 5,000 
 people in October 2005.  According to the survey, voters 
 in the Western Cape and Northern Cape provinces were the 
 
PRETORIA 00000722  003 OF 003 
 
 
 least likely to vote because of a lack of interest and 
 disillusion in politics, having the wrong identity 
 documents or not being registered.  Half of all 
 respondents criticized the floor-crossing legislation, 
 with the Western Cape registering the strongest 
 disapproval at 72%, followed by Free State and Northern 
 Cape provinces.  According to IEC, more than 21 million 
 eligible voters out of a possible 27 million have 
 registered to vote for the March 1 election.  Source: 
 Business Day, February 15. 
 
 TEITELBAUM