VZCZCXRO5891
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #1414/01 0971242
ZNR UUUUU ZZH
R 071242Z APR 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 2673
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 001414 
 
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 APRIL 7 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: 
 
 -  SA's Inflation Shows Signs of Growth Although Should 
 Remain Within Targets; 
 -  Manufacturing Sector Shows Signs of Fragile Recovery; 
 -  Higher Corporate Tax Collection Reduces Federal Deficit Even 
 Further; 
 -  NAAMSA Reports March Vehicle Sales Still Strong; 
 -  Business Confidence Improves Slightly in March; 
 -  Survey Shows 2005 South African FDI Higher than India's; 
 -  House Price Inflation Moderates; 
 -  January Retail Sales Slow; and 
 -  Clarification on Synthetic Fuel Tax and Mine Royalties. 
 End Summary. 
 
 SA's Inflation Shows Signs of Growth Although Should 
 Remain Within Targets 
 --------------------------------------------- ------- 
 
 ¶2.  South African inflation is trending higher, although 
 it should remain within the South African Reserve Bank's 
 (SARB) target band of 3%-6%.  SARB's main challenge, apart 
 from external factors such as the oil price, is credit 
 growth, which shows no signs of abating, and is slowly 
 becoming more of a threat to inflation.  Credit growth 
 increased 21.5% y/y in February compared to January's 
 20.6% growth, driven higher by strong demand for mortgage 
 advances.  Money supply (M3) increased 21% in February, 
 compared to January's increase of 19.7%.  SARB Governor 
 Tito Mboweni commented that interest rates would probably 
 not be reduced when the monetary policy committee meets 
 later in April.  Source:  Business Day, April 3. 
 
 Manufacturing Sector Shows Signs of Fragile Recovery 
 --------------------------------------------- ------- 
 
 ¶3.  Investec's Purchasing Managers Index (PMI), a measure 
 of manufacturing activity, rose to 51.5 in March from 49 
 in February, slightly above the 50 breakeven value 
 indicating that half of the respondents expect improvement 
 in business activity and half do not.  According to Andre 
 Roux of Investec Asset Management, the slight depreciation 
 of the rand during March improved both the export 
 performance of manufacturers as well as the degree of 
 import competition.  Most of the sub-components of the PMI 
 contributed to the rise in March, with the seasonally 
 adjusted business activity index gaining by 7 index points 
 to 54.9.  New sales orders improved to 53.3 from 49 in 
 February.  The employment index rose to 48.2 from 45.8 in 
 February, although most survey respondents still expect no 
 overall increase in manufacturing jobs.  Managers' 
 purchasing commitments improved further, with the index 
 climbing to 54 from 48.9 in February, which indicated that 
 managers were buying into the improved conditions within 
 the sector.  However, short-term (6-month) expectations 
 regarding general business conditions deteriorated during 
 March, with the expectations index decreasing from 71.4 in 
 February to 68.4.  Source:  Reuters, April 3; Business 
 Day, April 4. 
 
 Higher Corporate Tax Collection Reduces Federal Deficit 
 Even Further 
 --------------------------------------------- ---------- 
 
 ¶4.  South Africa collected more than R1 billion more than 
 the February 2006 estimate of R417 billion ($70 billion, 
 using 6 rands per dollar) due to higher than expected 
 corporate tax collections through the end of its fiscal 
 year 2005/06.  As of the March 31 end of the financial 
 year, the South African budget deficit was 0.3% of GDP, 
 closer to a balanced budget than February's estimate of 
 0.5%.  In February 2005, the National Treasury estimated 
 that tax collections would be R372.8 billion, R45.3 
 billion lower than the actual amount collected.  Personal 
 income tax collections were R125.4 billion below 
 February's 2006's estimate of R126.5 billion.  However, 
 according to the South African Reserve Bank's latest 
 quarterly bulletin, compensation of employees slowed in 
 2005 to 8.9% from 9.4% in 2004.  Manuel said that the 
 initial target of R372.8 billion was based on a set of 
 
PRETORIA 00001414  002 OF 003 
 
 
 macroeconomic assumptions that improved over 2005. 
 Source:  Business Day, April 4. 
 
 NAAMSA Reports March Vehicle Sales Still Strong 
 --------------------------------------------- -- 
 
 ¶5.  According to the National Association of Automobile 
 Manufacturers of SA (NAAMSA), March new vehicle sales 
 increased 29.1%, y/y, and on a month-on-month basis, the 
 sales increased 15.8%, compared with February 2006.  New 
 vehicle sales reached 56,341 units in March.  However, 
 analysts warn that March sales figures may seem overly 
 optimistic.  In 2005, the Easter holidays happened in 
 March rather than in April when it occurs in 2006, which 
 would inflate March 2006's growth.  Tony Twine, a motor 
 industry analyst and director of Econometrix, estimates 
 that about 12 percentage points of the new vehicles sales 
 growth is attributable to Easter being in March last year. 
 NAAMSA increased its growth projections for 2006 from the 
 previous 10% to between 15% and 20% due to a positive 
 macroeconomy, strong business and consumer confidence, 
 relatively low interest rates and vehicle affordability. 
 During March, all vehicle segments increased including 
 passenger vehicles, trucks and buses.  NAAMSA expects that 
 strong investment and government spending on 
 infrastructure would support growth in sales of medium and 
 heavy commercial vehicles.  Vehicle exports for the first 
 two months of 2006 were 7,869 units higher (54.4%), than 
 exports in the first two months of 2005.  Source: 
 Business Day and Business Report, April 5. 
 
 Business Confidence Improves Slightly in March 
 --------------------------------------------- - 
 
 ¶6.  The South African Chamber of Business's (SACOB) 
 business confidence index rose slightly in March to 100.9 
 from February's 100.1, although there were fewer 
 categories showing positive growth compared to the 
 previous two months.  The index is made up of 13 sub- 
 indices representing economic indicators that affect the 
 business mood.  Among the sub-indices are manufacturing 
 production, liquidations, inflation, the real prime 
 overdraft rate, the gold price and the rand exchange rate. 
 In March, the sub-indices on the exchange rate, inflation 
 and manufacturing output contributed negatively to the 
 confidence index, as did the liquidations sub-index. 
 SACOB expects that growth in gross domestic spending will 
 moderate in 2006.  Source:  Business Day, April 5. 
 
 Survey Shows 2005 South African FDI Higher than India 
 --------------------------------------------- ---------- 
 
 ¶7.  According to an Ernst & Young survey, the value of 
 mergers and acquisitions in South Africa increased 63% in 
 2005, leading to South Africa's foreign direct investment 
 (FDI) to be higher than India's 2005 FDI.  Mergers and 
 acquisitions reached R269 billion in 2005, including Old 
 Mutual's R38 billion takeover of Skandia, Barclays' R30 
 billion purchase of Absa and Vodafone's R21 billion 
 acquisition of Venfin shares.  R57 billion of the R269 
 billion was inward investment or FDI, equal to the foreign 
 investment of the previous five years combined.  South 
 Africa's FDI was smaller than China's or Brazil's 2005 FDI 
 but was larger than India's for the first time in surveys 
 sponsored by Ernst & Young.  The Ernst & Young survey is 
 one of two major gauges of mergers and acquisition in 
 South Africa, alongside that of Dealmakers.  Using 
 different criteria, Dealmakers put the total value of 
 mergers and acquisitions at R351 billion in 2005.  Source: 
 Business Day, April 5. 
 
 House Price Inflation Moderates 
 ------------------------------- 
 
 ¶8.  House price inflation continues to moderate, with 
 ABSA's house-price index growing nominally at 13.7% y/y in 
 March, compared to 14.6% in February, the lowest growth 
 rate since February 2002.  The average middle segment 
 house price is now at R765,400 ($127,600).  In real terms, 
 February house prices increased 10.3% y/y from January's 
 10.9% growth.  ABSA expects the average nominal house 
 inflation in 2006 to be 12% compared to 2005's inflation 
 of 22.1%.  Source:  Business Day, I-Net Bridge, April 5. 
 
 
PRETORIA 00001414  003 OF 003 
 
 
 January Retail Sales Slow 
 ------------------------- 
 
 ¶9.  According to Statistics SA, retail sales increased 
 5.6% y/y in January 2006 compared to December's 8.5% 
 growth.  Consumer demand has supported higher economic 
 growth in South Africa over the past two years, helped by 
 low nominal interest rates, inflation and an emerging 
 black middle class.  The South African Reserve Bank (SARB) 
 reduced its key repurchase rate by 6.5 percentage points 
 to 7% between 2003 and 2005, driving prime lending rates 
 to a 25-year low of 10.5%.  SARB has repeatedly cited 
 strong domestic consumption as one of the risks to an 
 otherwise benign inflation outlook.  Source:  Reuters, 
 April 5; Business Report, April 6. 
 
 Clarification on Synthetic Fuel Tax and Mine Royalties 
 --------------------------------------------- --------- 
 
 ¶10.  Finance Minister Trevor Manuel established timeframes 
 for two tax measures, committing the National Treasury to 
 release a new draft of the mining royalty bill by mid-May. 
 He also promised to announce in mid-April a task team that 
 would examine possible imposition of a windfall tax on 
 synthetic fuels.  The original draft of the Minerals and 
 Petroleum Royalty Bill was released for public comment in 
 March 2003 and a final draft was expected three years ago. 
 South Africa's new Mining Act is based on the principle 
 that South Africa's mineral rights belong to the nation 
 and can only be leased by private companies, which must 
 pay royalties for the right to exploit the resources.  The 
 royalty bill proposed levying royalty taxes ranging from 
 1%-8% of sales revenue, depending on what was being mined. 
 The proposals drew intense criticism from mining companies 
 and investors on the grounds that they would cut profit 
 margins and reduce investment in the industry, 
 particularly in new projects.  In addition, many of South 
 Africa's diamond and gold mines are aging and marginal. 
 Hence an additional revenue tax could push many marginal 
 properties into closure, with the consequent job and 
 export revenue losses.  The proposal that the royalties 
 would be levied on mines' gross sales revenue, rather than 
 on their profits, generated far more controversy than the 
 rates themselves.  Though there have been indications that 
 government might cut the royalty rates, it is not clear 
 whether it is open to changing the basis from sales to 
 profits. 
 
 ¶11.  The February 2006 National Treasury Budget Review 
 noted that the synthetic fuel industry, which accounts for 
 about 35% of South Africa's domestic liquid petroleum 
 sales, could receive substantial economic rents when crude 
 oil prices were high.  The review also pointed out that 
 these windfall gains should be shared with the public 
 since the synthetic fuel industry had developed with 
 extensive government support.  Manuel announced the task 
 force would examine imposing windfall taxes on the 
 synthetic fuel industry.  Source:  Business Day, April 4. 
 
 TEITELBAUM