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Cablegate: South Africa Economic Newsletter June 15 2006

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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

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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

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