Cablegate: South Africa Economic News Weekly Newsletter February 9,

DE RUEHSA #0663/01 0570852
R 260852Z FEB 07





E.O. 12958: N/A
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
- 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,

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,

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)


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