VZCZCXRO0336
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #2066/01 1390758
ZNR UUUUU ZZH
R 190758Z MAY 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3512
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 002066 
 
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 19 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: 
 
 -  Reserve Bank Highlights Growth Prospects, Inflation 
 Within Targets; 
 -  Vehicle Exports Increase by 58%; 
 -  Survey Shows Regulations Greatest Constraint to Business 
 Expansion; 
 -  Transnet and Unions Sign Restructuring Agreement; 
 -  Koeberg's Unit 1 Operational; 
 -  Business and Consumer Confidence Important; and 
 -  Spending on Conditional Grants Examined. 
 End Summary. 
 
 Reserve Bank Highlights Growth Prospects, Inflation Within 
 Targets 
 --------------------------------------------- ------------- 
 
 ¶2.  At the May 11th semiannual Monetary Policy Forum 
 meeting, officials from the South African Reserve Bank 
 (SARB) explained their reasons for leaving interest rates 
 unchanged.  The SARB's reasons included lowered inflation 
 expectations since November 2005 and inflation remaining 
 within the 3%-6% target range for 31 consecutive months. 
 The SARB expects inflation to remain within its target 
 range over the next several years.  However, risks to 
 inflation remain the same.  Increasing current account 
 deficits, rising oil prices, strong consumer demand and 
 increasing household debt levels still worry the SARB as 
 potential harbingers of accelerating inflation.  According 
 to SARB research, economic growth may accelerate to 5.1% 
 if the government halves unemployment in 10 years, 
 attracts another $804 million (R4.9 billion) a year in 
 foreign direct investment and raises the savings rate to 
 22% of GDP.  Currently, SARB research estimates growth 
 with stable inflation at 4.1%.  The South African 
 government is targeting annual growth of 6% by 2010 to 
 help reduce the official jobless rate of 26.7%, which is 
 the highest of 61 countries tracked by Bloomberg.  The 
 SARB's latest quarterly inflation forecast showed that the 
 targeted inflation rate, consumer prices without mortgage 
 costs, should accelerate to just below 5% in the first 
 quarter of 2007 and then remain slightly above the middle 
 of the target range until the first quarter of 2008. 
 Source:  Business Report, May 12. 
 
 Vehicle Exports Increase by 58% 
 ------------------------------- 
 
 ¶3.  According to the National Association of Automobile 
 Manufacturers of SA (NAAMSA), new export contracts by 
 major automobile manufacturers caused South African 
 vehicle exports to grow by 58% in the first quarter 2006. 
 Vehicle manufacturers such as Volkswagen SA, Toyota SA, 
 Daimler Chrysler SA and Ford Southern Africa have 
 multibillion rand export contracts, while General Motors 
 SA (GMSA) has said it would make the country its main 
 export base for its Hummer H3 vehicles.  New vehicle 
 exports increased from the fourth quarter 2005's level of 
 24,442 units to 38,541 units during the first quarter 
 ¶2006.  NAAMSA predicts that exports of vehicles should 
 increase by 50% in 2006.  During 2005, vehicle exports 
 reached 140,000.  Employment in the motor vehicle industry 
 reached 36,184 during the first quarter 2006, 3% higher 
 than the 4th quarter of 2005 and the highest aggregate 
 level in the past 8.5 years.  In the first quarter, sales 
 for passenger vehicles increased 21% (y/y), while new 
 commercial vehicle sales increased 24% (y/y).  Over the 
 past three years, prices of new cars (denominated in 
 rands) have remained relatively stable.  According to 
 Wesbank, the average price of a new car in 2005 was 
 R183,744 compared with the average price in 2002 of 
 R185,037.  Using the Automobile New Car Spend Index, over 
 the past 15 years there had been only one spike in the 
 average price of new vehicles between 2001 and 2002. 
 Source:  Business Day, May 16. 
 
 Survey Shows Regulations Greatest Constraint to Business 
 Expansion 
 --------------------------------------------- ----------- 
 
 
PRETORIA 00002066  002 OF 003 
 
 
 ¶4.  For the second consecutive year, Grant Thornton's 
 International Business Owners Survey (IBOS) showed that 
 regulations were the greatest constraint to the expansion 
 of business in South Africa.  According to the survey, 
 based on medium-sized businesses employing between 50 and 
 250 people, the proportion of people who cited this as the 
 major constraint had risen to 45%, up from 41% in 2005. 
 Small business owners reported varied experiences.  Some 
 cited complex black economic empowerment regulations and 
 difficulties in registering businesses as examples of 
 increased business costs due to regulation.  The survey 
 also found that 44% of business owners said that the lack 
 of a skilled workforce posed a threat, up from 36% in 
 ¶2005.  The manufacturing sector is the most affected, with 
 51% of business owners citing regulation costs as a 
 problem, while 48% cite a lack of skills as a major 
 constraint to their business growth.  Business growth in 
 the wholesale and retail sectors is least affected by cost 
 of regulations.  Source:  Business Report, May 16. 
 
 Transnet and Unions Sign Restructuring Agreement 
 --------------------------------------------- --- 
 
 ¶5.  South Africa's Transnet has signed an agreement with 
 four unions to guide the restructuring of the rail and 
 logistics group, resolving a nine month dispute that 
 caused a series of strikes.  Under the agreement, Transnet 
 will set time frames for the disposal of non-core 
 businesses and consult unions on strategic and operational 
 issues.  Transnet plans to dispose of about R7.7 billion 
 ($1.3 billion, using 6 rands per dollar) worth of non-core 
 assets to achieve more focused management goals.  The 
 streamlining of Transnet is crucial to effective capital 
 expenditure program of R40 billion over the next five 
 years aimed at improving transportation infrastructure. 
 Unions had been worried the restructuring process could 
 cost 30,000 jobs.  Both the government and Transnet have 
 repeatedly stressed there would be no layoffs.  The 
 disposal of non-core assets does not include national 
 carrier South African Airways (SAA), which will remain 
 government-owned, directly under the Department of Public 
 Enterprises rather than Transnet's jurisdiction.  Source: 
 Reuters, May 17. 
 
 Koeberg's Unit 1 Operational 
 ---------------------------- 
 
 ¶6.  Unit One at Koeberg Power Station in the Western Cape 
 was successfully returned to service after being out of 
 commission for the past five months for repairs.  The 
 generator was damaged in December 2005, resulting in both 
 the rotor and stator (upon which the rotor rotates) 
 requiring repair.  The stator was repaired at Koeberg, 
 while a replacement rotor was obtained from the French 
 utility, EdF.  Eskom expects Koeberg Unit 1 to be 
 operating at full power during the last week in May 2006. 
 Koeberg Unit 2, however, will be shut down on 22 May as 
 scheduled for refueling and maintenance, remaining offline 
 through most of July.  According to Eskom's Chief 
 Executive Thulani Gcabshe, a shortfall of up to 400 MW may 
 be experienced in the Western Cape during this period. 
 Demand side management measures such as the issuing of 
 five million Compact Fluorescent Lights (CFL's) to the 
 Western Cape and the swapping out of two plate electric 
 stoves for two plate gas stoves have begun to mitigate the 
 shortage, and so far minimal load shedding has occurred. 
 Source:  I-Net Bridge, May 18. 
 
 Business and Consumer Confidence Important 
 ------------------------------------------ 
 
 ¶7.  Investec economists Brian Kantor and Carmen Marchetti 
 view consumer confidence as more important in maintaining 
 a country's high growth rather than indicators such as 
 current account deficits or the level of household debt. 
 They argue that if South African debt is compared to net 
 wealth, the recent increases in debt levels become quite 
 sustainable.  In South Africa, net wealth as a percentage 
 of disposable income has risen from 256% in 2002 to 374% 
 in 2005.  The Investec strategy report predicts that the 
 household debt-to-income ratio will rise to above 70% over 
 the next two years compared to 4th quarter's 65.5%. 
 Confidence is a vital strategic asset and a lack of it has 
 restrained growth in many economies in recent years, 
 
PRETORIA 00002066  003 OF 003 
 
 
 including Japan's and several in Europe.  High business 
 and consumer confidence due to stable interest rates will 
 lead to faster economic growth.  Robust household spending 
 will lead to higher capital inflows, which will help 
 finance higher growth and maintain a relatively strong 
 rand, providing a check to increasing domestic inflation. 
 Source:  Business Report, May 17. 
 
 Spending on Conditional Grants Examined 
 --------------------------------------- 
 
 ¶8.  The Finance and Fiscal Commission found that the 
 spending of conditional grants (grants designed to be 
 spent for a specified purpose) at national and provincial 
 levels was not properly monitored.  The Commission 
 examined several health conditional grants to illustrate 
 conditional grant shortcomings.  According to the 
 Commission's findings, new conditional grants have been 
 introduced without regard to their relationship to 
 existing grants, with several uncoordinated grants serving 
 the same purposes.  In addition, the Commission's report 
 pointed out that there were no pre-implementation plans 
 and assessments that identified potential risks that might 
 impede implementation, nor were there guidelines to 
 mitigate such risks.  Conditions for spending were not 
 specified in detail and provinces were not required to 
 meet minimum standards.  The Commission asserted that 
 misdirected spending of two conditional health grants 
 worth R6.5 billion ($1.08 billion) undermined public 
 health goals and that these grants have not been 
 independently reviewed since they began in 1998.  The 
 Commission's report claimed that public hospitals received 
 only 52% of the funds necessary to provide a reasonable 
 service.  There were also 10.4% fewer hospital beds for 
 the sick than there should have been.  The Commission, set 
 up under the constitution to advise the Treasury on the 
 division of revenue between national, provincial and local 
 governments, presented its recommendations for 2007-08 
 allocations to the National Council of Provinces.  Source: 
 Business Day and Business Report, May 16. 
 
 TEITELBAUM