VZCZCXRO2492
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #1943/01 1321003
ZNR UUUUU ZZH
R 121003Z MAY 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3352
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 001943 
 
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 MAY 12 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: 
 
 -  Manufacturing Production Recovers in March; 
 -  Record Credit Growth Sparks Inflation Concerns; 
 -  Tourism Industry Key Contributor to Higher Growth; 
 -  Net Reserves Above $20 Billion; 
 -  SARS Expects to Increase 2006 Tax Returns; 
 -  5% Import Duty on Steel Removed; 
 -  Treasury Withholds Funds to Four Cities for the First Time; 
 and 
 -  South Africa Improves in Competitive Rankings. 
 End Summary. 
 
 Manufacturing Production Recovers in March 
 ------------------------------------------ 
 
 ¶2.  Manufacturing production resumed its over 5% growth in 
 March, reaching 5.7% from February's growth of 4%.  So 
 far, 2006's manufacturing growth has shown substantial 
 improvement, with production growing by 5.2% during the 
 first quarter 2006, compared to 4th quarter 2005's growth 
 of 3.5%.  The major contributors in the acceleration of 
 first quarter's growth include the motor vehicle, 
 petroleum and chemicals, and textile industries, although 
 communication and glass and non-metallic product 
 industries showed declines in quarterly growth.  The 
 recent acceleration in manufacturing growth matches 
 similar improvement shown by other indicators of 
 manufacturing activity, such as Investec's Purchasing 
 Manager's Index (PMI).  For the past two months, PMI has 
 indicated that current manufacturing activity has 
 expanded, with trade expectations at levels indicating 
 activity should improve over the next six months.  Source: 
 Statistics SA Release P3041.2 and Standard Bank's 
 Manufacturing Unpacked, May 11. 
 
 Record Credit Growth Sparks Inflation Concerns 
 --------------------------------------------- - 
 
 ¶3.  In March, private sector credit demand increased by 
 24.3%, from February's 21.5% growth, and higher than the 
 expected 22.4% increase.  March's increase in private 
 sector credit demand is the single largest monthly 
 increase.  M3, the broad measure of money supply, grew by 
 26.8% in March compared to a 21.1% increase in February. 
 In March, mortgages increased by 30%, investments by 28%, 
 installment sales by 19%, and leasing finance by 21%.  Tax 
 relief for individuals announced in the February budget 
 and strong growth in equity markets might have increased 
 deposits with the banking sector, while the sharp 
 reduction in transfer duties on property might have been a 
 factor leading to sharp growth in mortgages.  In the 
 fourth quarter 2005, household debt to disposable income 
 reached 65.6% and the latest credit growth suggests that 
 debt levels will continue to increase.  Johan Rossouw, the 
 chief economist at Vunani Securities, said while consumer 
 borrowing had pushed debt ratios to record levels, the 
 cost of servicing debt remained relatively low, about 7% 
 of disposable income.  He viewed the latest credit growth 
 increasing the probability of a rate increase at the next 
 Monetary Policy Committee meeting to 50%.  Source: 
 Standard Bank's Money Supply Alert, May 5; Business 
 Report, May 8. 
 
 ¶4.  Comment.  The next Monetary Policy Committee meeting 
 is scheduled for June 7.  Recent statements by both South 
 African Reserve Bank governor Tito Mboweni and Finance 
 Minister Trevor Manuel have pointed out the dangers of 
 increasing consumer debt if interest rates rise, leading 
 to increasing expectations of the SARB leaning towards 
 future interest rate hikes.  Although most expect interest 
 rates to remain unchanged in June, a growing number of 
 forecasts expect higher interest rates by year end.  End 
 comment. 
 
 Tourism Industry Key Contributor to Higher Growth 
 --------------------------------------------- ---- 
 
 ¶5.  Deputy President Phumzile Mlambo-Ngcuka emphasized the 
 importance of tourism in meeting the Accelerated Shared 
 
PRETORIA 00001943  002 OF 003 
 
 
 Growth Initiative's goal of increasing South Africa's 
 growth to 6% by 2010.  Currently, tourism created one job 
 for every 12 tourists arriving in South Africa.  The 
 number of tourists arriving in South Africa reached 7 
 million in 2005, compared to 1 million in 1990.  More than 
 60% of South African arrivals were from Africa.  Mlambo- 
 Ngcuka said government was working to increase air slots 
 in line with demand.  A `univisa' granting easier travel 
 access to visitors from Southern African Development 
 Community countries was also planned.  Most tourists 
 travel to three provinces:  KwaZulu-Natal, Gauteng, and 
 Western Cape.  Mlambo-Ngcuka wants to diversify tourist 
 destinations to achieve higher growth in other parts of 
 the country.  Source:  Business Day, May 8. 
 
 Net Reserves Above $20 Billion 
 ------------------------------ 
 
 ¶6.  South Africa's net reserves rose by $579 million (R3.5 
 billion) in April to reach $20.07 billion slightly above 
 $20 billion, a level seen internationally as a milestone 
 for emerging markets.  Gross reserves increased to $23.8 
 billion from $23 billion at the end of March.  The 
 improvement in South African reserves has led several 
 credit rating agencies to improve their South African 
 ratings.  In August 2005, Standard & Poor's increased 
 South Africa's long term foreign currency and local 
 currency ratings on South Africa to BBB+ and A+, 
 respectively, equivalent to Moody's rating of Baa1, with 
 both ratings being 3 notches above junk status.  Moody's 
 rated South Africa two levels above India and five above 
 Brazil's ratings score.  However in April, Moody's 
 suggested that South Africa's widening current account 
 deficit could prevent a further upgrade in its credit 
 rating in the near term.  South Africa's deficit on 
 current account reached 4.2% of GDP in 2005 from 2004's 
 3.4% of GDP.  The increasing deficit on the current 
 account will put pressure on the rand if it is not 
 financed by incoming capital inflows.  Source:  Business 
 Report, May 9. 
 
 SARS Expects to Increase 2006 Tax Returns 
 ----------------------------------------- 
 
 ¶7.  According to Finance Minister Trevor Manuel, the South 
 African Revenue Service (SARS) expects to increase SA's 
 national tax returns by 8%-12% in 2006.  SARS also plans 
 to process 80% of correctly compiled tax returns within 90 
 days during peak periods (July to February) and 34 working 
 days during off-peak periods.  Tax returns increased 8% in 
 2005, where 14 million returns were processed, with 
 330,000 new taxpayers.  Currently, there are about 1.4 
 million corporate taxpayers and 4.5 million individual 
 taxpayers on the register.  SARS also introduced an 
 electronic submission facility for 2.7 million taxpayers, 
 planned to be available from June 1.  According to Manuel, 
 improving of tax compliance in South Africa had 
 contributed to a reduced budget deficit, significant tax 
 relief, and a general lower tax burden for all.  SARS 
 collected R418.1 billion in fiscal 2005-06, exceeding a 
 revised target of R417 billion.  Source:  Business Day, 
 May 10. 
 
 5% Import Duty on Steel Removed 
 ------------------------------- 
 
 ¶8.  Mandisi Mpahlwa, the Minister of Department of Trade 
 and Industry (DTI), signed regulations to remove the 5% 
 duty on steel imports.  A review of the import-parity 
 pricing policies is continuing and should be completed by 
 June.  The review will determine which specific 
 legislative changes will be introduced to the Competition 
 Act.  Tshediso Matona, the Acting Director-General in DTI, 
 emphasized that proposed changes in the import pricing 
 policies would involve all concerned industries and not 
 just the steel industry.  Source:  Business Report, May 
 ¶10. 
 
 Treasury Withholds Funds to Four Cities for the First Time 
 --------------------------------------------- ------------- 
 
 ¶9.  For the first time, National Treasury withheld grants 
 worth R95 million ($15.8 million, using 6 rands per 
 dollar) from Cape Town, Nelson Mandela (Port Elizabeth), 
 
PRETORIA 00001943  003 OF 003 
 
 
 Emfuleni (Vereeniging) and Mangaung (Bloemfontein) 
 metropolitan councils, because they failed to comply with 
 conditions laid down for the grants.  At a hearing in 
 Parliament, Lungise Fuzile, Treasury's Deputy Director- 
 General for intergovernmental relations, described the 
 conditions that each municipality had to fulfill before 
 the restructuring grants could be given.  Indicators 
 include regular credit ratings by independent assessors, 
 sustainable debt ratios, and a revenue collection ratio 
 approaching 97%.  Municipalities had to show consistent 
 progress towards these goals.  The amount of withheld 
 money was relatively small.  Cape Town lost R30 million 
 ($5 million), Nelson Mandela R20 million ($3.3 million), 
 Emfuleni R35 million ($5.8 million), and Mangaung R10 
 million ($1.6 million).  Source:  Business Report, May 11. 
 
 South Africa Improves in Competitive Rankings 
 --------------------------------------------- 
 
 ¶10.  In the annual IMD International's World 
 Competitiveness Yearbook, South Africa improved by 2 
 positions, reaching 44th out of 61 countries ranked, due 
 to better governance.  South Africa's current ranking is 
 closer to its highest of 39th in 2002.  Its 2003 and 2004 
 rankings declined to 47 and 49, respectively, although 10 
 additional economies were included in the overall rankings 
 in 2003.  The ranking is based on government efficiency, 
 business efficiency, economic performance and 
 infrastructure.  The biggest gain was in government 
 efficiency with the country moving from 34th place to 
 28th.  Reasons for the improvement included the lower 
 effective personal income tax rate as a percentage of GDP, 
 management of public finances and policy direction of 
 government.  Factors holding back further improvement in 
 South Africa's governance ranking included immigration 
 laws, personal security and labor regulations.  South 
 African business improved its ranking to 38th place from 
 40th place in 2005.  Improvements in business came because 
 of a rise in stock market capitalization as a percentage 
 of GDP, a rise in the female labor force as a percentage 
 of total employment, social responsibility of business 
 leaders, protection of shareholder rights, and improved 
 auditing and accounting practices.  Leading to 
 deterioration in South African business competitiveness 
 was the unavailability of skilled labor, a decline in the 
 labor force as a percentage of the population, the brain 
 drain and worsening labor relations.  South Africa's worst 
 performance was its infrastructure ranking, dropping to 
 60th place from 2005's 58th ranking.  In terms of economic 
 performance, South Africa fell from 42nd to 46th.  The 
 report listed overall factors that influenced South 
 Africa's ranking.  Among the improvements noted were 
 direct and portfolio inward investment, total reserves, 
 high technology exports, value traded on the JSE, ease of 
 doing business, a reduction in tax evasion, the legal and 
 regulatory framework, and quality of life.  The negative 
 factors include a rise in the consumer price index from 
 1.4% in 2004 to 3.4% in 2005, a fall in direct investment 
 abroad, a larger current account deficit, concerns about 
 energy infrastructure, a decline in tourism receipts, a 
 decline in exports of commercial services, the brain drain 
 and poor implementation of government decisions.  Source: 
 Business Report, May 11. 
 
 TEITELBAUM