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UNCLAS SECTION 01 OF 03 PRETORIA 000663 
 
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 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
PGOV, SF 
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER FEBRUARY 9, 
2007 ISSUE 
 
 
PRETORIA 00000663  001.2 OF 003 
 
 
¶1. (U) Summary.  This is Volume 7, issue 08 of U.S. Embassy 
Pretoria's South Africa Economic News weekly newsletter. 
 
Topics of this week's newsletter are: 
- Budget in Brief 
- Inflation "Still in Check" 
- EU Include SA in SADC EPA Negotiations 
- Interest Groups Raise Concerns About Biofuels Strategy Development 
Process 
- SA Competitiveness Among Top 50 
- US Marines Order 90 SA Vehicles 
End Summary. 
 
 
Budget in Brief 
--------------- 
 
¶2. (U) In his 2007 Budget Speech, Minister of Finance Trevor 
Mannual, announced that South Africa has achieved a budget surplus 
for the first time since the early-1980's at 0.3% of GDP.  Another 
budget surplus of 0.6% of GDP is expected for the 2007/08 fiscal 
year.  Manual said the surplus was mainly due to 
higher-than-expected revenue collection as a result of wider tax 
collection and buoyant economic growth.  Other achievements for the 
SAG include a debt-to-GDP ratio that has fallen to 31% of GDP and 
debt servicing costs of only 10.5% of total expenditure.  Manuel's 
speech painted a healthy picture of the economy with GDP growth for 
2006 expected to reach 4.9%.  In 2007, Manuel forecast slightly 
weaker growth of 4.8% but added that the economy should average 
around 5.1% growth over the next three years.  Inflation, as 
measured by CPIX is expected to average 4.7% per year up to 2010. 
However, the ratio of tax-to-GDP has risen to more than 27%, well 
off government's original promise of 25%, and is set to rise to 28% 
or more in coming years. This, one economist said, indicates that 
South Africans were overtaxed and that the SAG's growing share in 
the economy is becoming counter- productive. 
 
¶3. (U) There were few surprises on the taxation side. Manuel gave 
tax relief of R8.4 billion ($1.2 billion) to low income taxpayers, 
bringing net relief to 12.4 billion ($1.75 billion).  Arguably the 
most well-received of the tax reforms was the scrapping of the tax 
on interest and rental income of retirement funds which will fall 
away on March 1, 2007.  Manuel has also amended the contentious 
Secondary Tax on Companies with the rate of tax charged on dividend 
payments set to fall from 12.5% to 10% on October 1, 2007.  The 
conversion to a dividend tax will be imposed at the shareholder 
level by the end of 2008 subject to the renegotiation of a number of 
international tax treaties.  Excise taxes have predictably been 
hiked, with tax on a packet of 20 cigarettes increased by 60 cents, 
tax on a can of beer by 5 cents, a bottle of wine by 10 cent, and a 
bottle of spirits by R1.88.  Bad news for motorists is that the 
general fuel levy will increase by 5 cents per liter while 
contributions to the Road Accident Fund will also be increased by 
the same amount. That implies a 10 cents increase in the price of a 
liter of petrol. 
 
¶4. (U) The SAG's policy of social delivery, job creation and human 
capital development received frontline attention in the budget. 
Education continued to be the biggest single spend item, receiving 
35% of the total social services budget.  Social services accounted 
for 51% of the allocated expenditure. Key objectives included 
increased teacher remuneration, upgrading public transport, and 
improving the delivery of housing, health, education and justice. 
Over the next three years, Manuel set aside an additional R13.3 
billion ($1.9 billion) for the 2010 FIFA World Cup, bringing the 
total contribution from national government to R17.4 billion ($2.5 
billion), with R8.4 billion ($1.2 billion) for stadiums and R9 
billion ($1.3 billion) for transport infrastructure.  Further, 
Manuel increased expenditure on police by 34% over the next three 
years and money allocated to the Department of Justice increased by 
52% over the same period.  The increased spending on justice would 
be to improve court capacity and reduce case backlogs, while more 
police will be recruited to bring the police force from 152,000 to 
190,000 by 2010.  Manuel also revealed plans to impose a mandatory 
earnings-related social security tax to provide improved 
unemployment insurance, disability and death benefits for taxpayers, 
with a view to implementation in 2010.  For low-income workers 
falling below the tax threshold, Manuel said a wage subsidy was in 
the offing.  Meanwhile, state old-age pension, disability and care 
 
PRETORIA 00000663  002.2 OF 003 
 
 
dependency grants increase by R50 to a maximum of R870 ($123) per 
month. Child support grants will be increased by R10 to R200 ($28) 
per month while foster care grants rise to R620 ($87) per month. 
The number of beneficiaries of social grants has risen from 3 
million in 1997 to 11.8 million today, almost one quarter of the 
total population. 
 
¶5. (U) Regarding the possible imposition of a windfall tax on the 
liquid fuels sector, Manuel said recommendations involved either an 
outright tax on windfall profits or an incentive arrangement for new 
investment in liquid fuel capacity. Although Manuel said both 
proposals had merit he assured industry that it would be consulted 
before the matter was finalized. This implies that companies like 
Sasol could avoid the tax if they invested a portion of their 
profits in expanding productive capacity. The Minister continued a 
gradual process of exchange control relaxation and lowered the 
current shareholding threshold for foreign direct investment outside 
Africa from 50% to 25% to further enable SA companies to engage in 
strategic international partnerships.  (Budget Speech, February 21, 
2007) 
 
Inflation "Still in Check" 
-------------------------- 
 
¶6. (U) Statistics South Africa (StatsSA) announced that CPIX 
inflation (consumer price index excluding mortgage charges) 
increased by 5.3% in January, slightly above forecasts of 5.2%, 
after 5.0% in December.  Stats SA said the CPIX increase was due 
mainly to hikes in food, followed by transport, medical care and 
health expenses that were partly balanced out by annual decreases in 
clothing and footwear.  Economists pointed out that January is 
normally the month when most traders implement their annual price 
hikes.  Moreover, economists feel that inflation is still largely 
under control and expect that the current inflationary cycle is very 
close to a peak and that a downtrend could start soon.  The Reserve 
Bank kept its key repo rate steady at 9% last week after 200 basis 
points worth of hikes last year, saying the inflation outlook had 
improved.  (Fin 24, February 22, 2007) 
 
EU Include SA in SADC EPA Negotiations 
-------------------------------------- 
 
¶7. (U) The European Union (EU) has agreed to include SA in its 
negotiations with the Southern African Development Community (SADC) 
for an Economic Partnership Agreement.  SA, which is a member of 
both the Southern Africa Customs Union (SACU) and SADC, is pressing 
for trade integration in the region among all the various custom 
unions.  SA and the EU are at the same time reviewing their Trade, 
Development and Cooperation Agreement in an attempt to align the SA 
and SADC-EU trade agreements.  The EU has, however, placed 
conditions on SA's participation.  The EU wishes to provide the 
lesser developing countries greater benefits, which will result in a 
differential trade regime.  SA will likely continue to press for a 
single uniform trade agreement.  The first formal meeting between SA 
and the EU is scheduled in the beginning of March. (Business Day, 
February 16, 2007) 
 
Interest Groups Raise Concerns About Biofuels Strategy Development 
Process House Costs 
--------------------------------------------- 
 
¶8. (U) South African civil society, environmental groups and trade 
unions have expressed concern about the manner in which the 
Department of Minerals and Energy (DME) conducts the country's 
biofuel strategy consultation process.  According to Liz McDaid of 
ASFC, the DME provided only four days for people to comment on the 
strategy.  In addition to the short notice concerns, the 
stakeholders believe that cabinet has already agreed in principle to 
the content of the document, which will have an impact on the 
industrial policy of the country.   Other concerns are related to 
food security, job creation (approximately 55,000) and that growing 
food to fuel cars would cause price increases and food shortages. 
The stakeholders argued that they need more time to formulate 
meaningful contributions to the draft document.  The Botanical 
Society of SA (BSSA) complained that they had put together some 
technical concerns to raise with the DME, but they are disappointed 
because they will not have time to present them properly.  The 
stakeholders argue that the strategy does not supports government's 
policy for accelerating growth and job creation because only 
 
PRETORIA 00000663  003.2 OF 003 
 
 
large-scale commercial corporations would benefit from it. 
Meanwhile, other stakeholders indicated that they would boycott the 
due-planned series of workshops and organize their own to help the 
broader civil society.  (Business Day and Cape Times February 16, 
2007) 
 
SA Competitiveness Among Top 50 
------------------------------- 
 
¶9. (U) According to the World Economic Forum's Global 
Competitiveness Index (CGI) for 2006-07, South Africa was ranked 
among the top 50 economies in the world, coming in at 45th place, 
down from 40th place in 2005.  The CGI ranks countries along nine 
categories, including institutions, macro-economic policies, and 
health and education.  South Africa was ranked in the 30's and 40's 
in most categories but scored a disastrous 103rd place in the health 
and primary education category.  South Africa's highest rankings 
were in market efficiency (33rd place) and institutions (36th 
place).  According to the CGI, Switzerland has the most competitive 
economy in the world.  The United States ranks at 6th place, down 
from the 1st place in 2005.   (ABSA EconoTrends, February 21, 2007) 
 
 
US Marines Order 90 SA Vehicles 
------------------------------- 
 
¶10. (U) The US Marine Corps has placed a $55.4 million order for 90 
South African-designed RG33 mine-resistant and ambush-proof 
vehicles.  BAE Systems' South African unit, Land Systems OMC, won 
the order after turning around a request for a proposal from a 
clean-sheet design to delivering a working, blast-tested prototype 
in less than seven weeks.  The advanced tactical wheeled vehicles 
will offer enhanced protection to US marines and soldiers under the 
Mine Resistant Ambush Protected (MRAP) vehicle program. "BAE Systems 
has successfully completed its own blast testing of the RG33 vehicle 
design, and the results met or exceeded the MRAP survivability 
requirements in all cases," said John Swift, MRAP Program Manager 
for BAE Systems at its Triangle, Virginia office.  (I-net Bridge, 
February 20, 2007) 
 
BOST