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Cablegate: South Africa Economic News Weekly Newsletter May 25, 2007

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DE RUEHSA #1909/01 1450939
ZNR UUUUU ZZH
R 250939Z MAY 07
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 0021
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHJO/AMCONSUL JOHANNESBURG 6840
RUEHTN/AMCONSUL CAPE TOWN 4409
RUEHDU/AMCONSUL DURBAN 8870

UNCLAS SECTION 01 OF 03 PRETORIA 001909

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 MAY 25, 2007
ISSUE


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1. (U) Summary. This is Volume 7, issue 21 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- There's No Stopping SA's Economy
- Debate On Widening Current Account Deficit
- Woolworths in R292m BEE Employee Deal
- Construction Industry 'Hurtling Towards Huge Growth'
- Tax Overruns Help Treasury to Buy Back Debt
- Land Claims Will Again Miss Deadline
End Summary.

--------------------------------
There's No Stopping SA's Economy
--------------------------------

2. (U) According to the Bureau for Economic Research (BER), the
South African economy will grow faster than anticipated in the short
term, buoyed by resilient consumer demand, fierce momentum in fixed
investment, and stronger export growth. BER said it expected gross
domestic product (GDP) to expand by 4.8% in 2007 and 5% in 2008,
compared with its first-quarter estimates of 4.5% growth for both
years. The BER said previous expectations of a more constraining
growth environment in 2007 have thus far not materialized. The
economy expanded by 5% last year, after growing by 5.1% in 2005,
levels which the South African Reserve Bank (SARB) believes exceed a
sustainable growth rate of 4.5%, and may generate capacity
constraints. The government plans to spend R416 billion ($60
billion) on infrastructure over the next three years, to boost the
annual growth rate to a sustainable 6% by 2010. So far, the faster
economic growth has been driven mainly by consumer demand, a trend
which remains firmly in place despite higher interest rates. The
BER said it had revised its forecasts for all three demand
components of GDP upwards, including household consumption, fixed
investment and exports. (Business Day & I-Net Bridge, May 17, 2007)

------------------------------------------
Debate On Widening Current Account Deficit
------------------------------------------

3. (U) Debate is swirling over the threat to the economy of the
ballooning deficit on the current account, widely seen as the main
weakness in an otherwise robust economy. The shortfall in what is
considered the broadest measure of trade in goods and services
ballooned to 6.4% of gross domestic product (GDP) last year, the
widest gap since 1971, when it reached 7.5%. Deputy Finance
Minister Jabu Moleketi acknowledged last week that the deficit was
unlikely to shrink soon, given the government's infrastructure
spending plans and preparations for the 2010 Soccer World Cup. But
he maintained that the trend was healthy because it reflected
imports of capital goods needed to expand the economy's capacity,
which is being tested by robust demand and investment. Although the
growing deficit leaves the rand vulnerable to swings in global
sentiment, the South African Reserve Bank believes there is no cause
for alarm because the current account deficit is being covered by
strong capital inflows, amounting to about R100 billion ($14.3
billion) over each of the past three years. Economists generally
agree. The Bureau for Economic Research (BER) said in its latest
outlook that deficits of more than 7% of GDP were "not uncommon" and
a "significant" number of countries had run large deficits for more
than five years. However, the BER highlighted the potential risk if
global sentiment swings in the wrong direction, causing capital
flows to dry up, knocking the rand lower, and igniting inflation
with the higher cost of imported goods. Portfolio inflows into
bonds and equities have amounted to about R42 billion ($6 billion)
so far this year, as against R64.5 billion ($9.2 billion) in the
corresponding period last year. SARB data showed that foreign
direct investment, the most stable form of capital flow, shifted
from an inflow of R12.2 billion ($1.7 billion) in the first half of
2006 to an outflow of R14.3 billion ($2 billion) in the second half.
(Business Day, May 22, 2007)

-------------------------------------
Woolworths in R292m BEE Employee Deal
-------------------------------------

4. (U) Woolworths Holdings announced a black economic empowerment
(BEE) deal, whereby Woolworths employees would acquire about 10% of
the group's ordinary issued share capital. In terms of the deal,

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Woolworths will create a new class of convertible, redeemable,
non-cumulative participating preference shares with a par value of
15 cents each. Woolworths has estimated the economic cost of
entering into the BEE transaction to be about R292 million ($42
million). This represents about 1.38% of Woolworth's market
capitalization of nearly R21.1 billion ($3 billion). All Woolworths
employees who were employed as of May 1, 2007 and who are still
employed as of the initial vesting date, which is expected to be
June 30, 2007, will be able to participate in the BEE transaction,
with the exception of white managers and executives. About 17,000
employees will participate in the transaction, of whom 90% are black
and 85% are women. The BEE transaction will require the approval of
Woolworths ordinary shareholders at a general meeting to be held on
June 12. (I-net Bridge, May 21, 2007)
--------------------------------------------- ------
Construction Industry 'Hurtling Towards Huge Growth'
--------------------------------------------- ------

5. (U) The South African construction industry will double in size
over the next six to seven years, spurred mainly by the government's
massive infrastructure spending drive, says a former top executive
from the sector. Mike Lomas, former Chief Executive Officer (CEO)
of the Group 5 construction firm, said the trend would magnify
growing capacity constraints and exacerbate a skills shortage in the
sector, but he believed the construction industry would be able to
take on the challenge. Currently the industry has a huge demand for
civil engineers and artisans as registered artisans have dropped
from 33,000 in 1975 to 1,440 in 2005. Lomas foresaw that in the
next six to seven years the industry would have to increase its
business capacity by 89%, and would need an additional 11,000
engineers and 50,000 artisans. According to Statistics South Africa
(StatsSA) data, construction industry is the fastest-growing sector
of the economy, having expanded by 11% in 2004, 11.9% in 2005 and
13.3% in 2006. The construction sector's contribution to overall
gross domestic product (GDP) is 2.8%. However, some analysts
believe this figure may be understated, given that the survey is
unlikely to reflect all subcontractors. Industry experts expect the
growth momentum to continue beyond the 2010 Soccer World Cup as
construction of soccer stadiums forms only a small part of the
government's plans to spend R416 billion ($60 billion) on power
plants, ports, rail and road infrastructure over the next three
years. Private sector building figures released by StatsSA this
week showed the construction boom is still going strong, with the
total value of building plans approved in March up 11.8% compared
with the same month last year, after an 8.3% rise in February.
Formal jobs in the labor-intensive construction sector had risen
from 60,000 three years ago to an impressive 100,000 today.
(Business Day, May 18, 2007)

-------------------------------------------
Tax Overruns Help Treasury to Buy Back Debt
-------------------------------------------

6. (U) The South African National Treasury will buy back $1.2
billion of foreign debt, most of which is due to mature in 2008 and
2009, using new bond issues and tax overruns. National Treasury
Director General Lesetja Kganyago said a new $1 billion bond, which
would mature in 2022, would be issued and $217 million of tax
revenue overruns would be paid out. The new bond would be at a
lower interest rate than the old one, meaning there would be
savings, Kganyago said. By pushing out the maturity date of the
principal repayments, South Africa's external vulnerability would be
reduced. He said retiring debt was the best use of tax overruns.
Because the new bond would be so large, Kganyago said, it would
attract interest in international markets and would be liquid.
(Business Report, May 17, 2007)

------------------------------------
Land Claims Will Again Miss Deadline
------------------------------------

7. (U) Agriculture and Land Affairs Minister Lulu Xingwana said that
a second deadline for the conclusion of claims in the land
restitution process would be missed. So far, 74,417 claims have
been finalized, representing 93%, out of a total of 79,696. She
said about a third of the remaining 5,279 claims would not be
finalized by the March 2008 deadline. President Thabo Mbeki
declared in 2004 that the land restitution process was too slow and
ordered it completed by December 2005. When that deadline was

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missed, the completion date was extended to March 2008. Xingwana
blamed the delay on the lengthy adjudication process in the Land
Claims Court, conflicts among traditional leaders over jurisdiction,
land ownership and boundary disputes between communities, disputes
with current landowners on issues such as land prices or the
validity of the claims, and claimants who cannot be traced. On the
issue of redistributing 30% of white-owned farm land to blacks by
2014, Xingwana indicated that more money would have to be made
available to achieve the target. The agriculture sector has long
insisted that if the government bought up agricultural land that
became available on the open market, there would be enough land
available to satisfy the redistribution program. (Business Day, May
21, 2007)
BOST

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