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DE RUEHSA #2508/01 1710433
ZNR UUUUU ZZH
R 200433Z JUN 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4065
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS PRETORIA 002508 
 
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 JUNE 15 2006 
ISSUE 
 
¶1. Summary.  Once every two weeks, 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: 
 
-  South African Reserve Bank (SARB) Raises Interest 
Rates; 
-  SARB Reserves Growth Rate Declines; 
-  Johannesburg Stock Exchange Publicly Listed; 
-  Housing Market Falls to 6-yr Low; Vehicle Sales and 
Manufacturing Output Decline; 
-  Sasol Opens World's Largest Gas-to-Liquid Plant; 
-  Government Has No Intention to Relax Employment Equity 
Requirements; 
-  PriceWaterhouseCoopers Releases Annual Survey of S.A. 
Insurance; and 
-  Tax Amnesty Extended for Small Business. 
End Summary. 
 
South African Reserve Bank (SARB) Raises Interest Rates 
------------------------------------------ 
 
¶2.  The South African Reserve Bank unexpectedly hiked 
interest rates 50 basis points on June 8, demonstrating 
government resolve against rising inflation and halting 
the rand's fall against the dollar.  South Africa 
maintains a CPIX (CPI excluding mortgage costs) inflation 
target between 3 and 6 percent, a goal that it has met 
consistently since 2002.  Higher interest rates, however, 
threaten to damage the country's already-stumbling 
manufacturing sector and cool the expanding construction 
and housing markets.  The JSE responded to the surprise 
increase with the largest one-day drop (6.88%) since the 
internet bubble burst in April 2000, recovering all but 
1.8% of the initial drop by the end of the week, then 
falling again in the following week.  South African real 
interest rates (repurchase rate deflated by CPI) are 2.4 
percentage points above equivalent U.S. real interest 
rates.  South Africa's real repurchase rate is now 3.8% 
(7.5% deflated by 3.7% CPI inflation in May, while the 
real U.S. federal funds rate is 1.4% (5% federal funds 
rate deflated by 3.6% U.S. May CPI inflation).  Source: 
Business Day, Forbes. 
 
SARB Reserves Growth Rate Declines 
--------------------------------------------- - 
 
¶3.  The SARB acquired $258 million in reserves during May, 
barely half of the average $500 million per month added 
since the beginning of 2005.  The SARB, however, declared 
that slower reserves growth is in line with its policy of 
augmenting reserves when the exchange rate is favorable; 
the rand fell significantly against the dollar last month. 
Net reserves now stand at roughly US $20.36 billion. 
Source: Business Day. 
 
 Johannesburg Stock Exchange Publicly Listed 
 --------------------------------------------- ---- 
 
¶4.  The Johannesburg Stock Exchange (JSE), the world's 
16th largest stock exchange, publicly listed its shares 
for the first time on June 5.  The price-to-earnings ratio 
of its stock (20.5) is nearly twice that of the average 
JSE-listed company, part of a world-wide trend of high 
interest in stock exchange stocks.  Source: Financial 
Mail, Business Day 
 
Housing Market Growth Falls to 6-yr Low; Vehicle Sales and 
Manufacturing Output Decline 
------------------------------ 
 
¶5.  According to the June 5 Absa house-price index, rising 
household debt and expectations of an interest-rate hike 
cooled the housing market in May.  Though house prices 
were still 12.3% higher than in May 2005, that figure 
represents a decline from the 13.2% growth in the year 
leading up to April 2006.  The National Association of 
Automobile Manufacturers of South Africa (NAAMSA) reported 
on June 5 that although the market is still robust, 
vehicle sales are slowing.  NAAMSA members, representing 
roughly 90% of vehicle sales in South Africa, reported 
15.2% growth between April 2005 and April 2006.  Of the 
NAAMSA vehicle categories, sales of heavy trucks increased 
most (16.7%).  Vehicle exports continued to increase 
dramatically: 65% higher in 2006 than first quarter 2005. 
Statistics SA released data on June 7 showing a sharp 
April contraction in manufacturing, the economy's second- 
largest sector.  Economists attribute the slowdown-2% 
month-on-month-to April's strong rand.  The SARB's 
interest-rate hike is likely to further inhibit 
manufacturing.  Source: Business Day, Financial Mail 
 
Sasol Opens Worlds Largest Gas-to-Liquid Plant 
----------------------------------------- 
 
¶6.  The South African energy company Sasol, along with its 
partner Qatar Petroleum, formally opened their new Oryx 
GTL (gas-to-liquid) plant on June 5.  Sasol expects the 
$950 million facility to produce 34,000 barrels a day of 
liquids from natural gas, rising ultimately to 100,000 
barrels daily.  Sasol's GTL technology, developed during 
the apartheid-era oil embargo of South Africa and honed in 
a 2000 joint venture with Chevron, already operates 
profitably in two smaller plants in South Africa itself. 
The company overall provides 40% of the country's liquid 
fuel through GTL and coal liquification.  Sasol plans a 
Nigerian plant similar to that in Qatar, to be in place by 
mid-2009. Source: Business Report, June 7; Engineering 
News, June 8; Sunday Times, June 11. 
 
Government Has No Intention to Relax Employment Equity 
Requirements 
------------------------------- 
 
¶7.  Deputy President Mlambo-Ngcuka said that the 
government had no intention of relaxing employment equity 
requirements to allow qualified whites to take up 
vacancies, but would rather use them to mentor those who 
lacked skills.  The present BEE (affirmative action) 
program intends to correct the race-skewed employment 
composition inherited from apartheid. Employment equity is 
one of the seven criteria to be measured to rate a firm's 
contribution to BEE.  BEE has been criticized by many 
business leaders and the opposition Democratic Alliance 
for hampering business and for failing to adequately 
address the country's shortage of skilled workers. 
Source: Business Day, June 8; Independent, June 15 
 
PriceWaterhouseCoopers Releases Annual Survey of S.A. 
Insurance 
--------------------------------------------- ------------- 
 
¶8.  A new survey, titled Emerging Trends and Strategic 
Issues in South African Insurance, shows major changes in 
the industry stemming from regulatory change and a spate 
of bad publicity over the last year.  Prices are likely to 
fall and fees will be more transparent as firms compete to 
rebuild public trust and business.  It also projects that 
large foreign insurers, as yet unrepresented in South 
Africa, will make a major impact in coming years.  Source: 
iAfrica, Sunday Times, June 14. 
 
Government Extends Tax Amnesty for Small Businesses 
--------------------------------------------- 
 
¶9.  In an effort to bring more companies into regular tax 
compliance, Finance Minister Trevor Manuel expanded a tax 
amnesty for small to medium-sized businesses with an annual 
turnover of up to R10 million (under $1.5 million).  The 
plan would waive all penalties and taxes for qualifying 
companies and individuals in exchange for a one-time penalty 
not exceeding 5% of their 2005-2006 taxable income.  The 
exact percentage is calculated on a graduated scale. 
Previously, the government's tax amnesty offer only covered 
businesses with net annual income of R5 million or less and 
levied penalties of up to 10%.  Manuel's initiative 
particularly targets the country's large informal sector, 
including taxi drivers, stall owners, and illegal bars.  A 
rough estimate by the National Treasury is that 100,000 
businesses in South Africa qualify.  Manuel further 
threatened those choosing to ignore the extended amnesty 
offer with harsh penalties when it expires in May 2007. 
Source: Mail and Guardian, SABC, June 14. 
 
Business Confidence Falls, Though Still High 
--------------------------------------------- ------------- 
 
¶10.  According to the Bureau for Economic Research (BER), 
business confidence in South Africa slipped from 86 to 82 
in the second quarter of 2006, though levels are still 
historically high and stable.  The drop reflects an 
expected cooling of consumer spending, which has increased 
dramatically over the last two years, a weaker rand, 
rising interest rates, and falling share and gold prices. 
The BER projects a mild economic slowdown through the 
remainder of the year. (iAfrica, Business Day, June 15) 
 
TEITELBAUM