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South Africa has moved to ease the pain the economic downturn has had on the manufacturing industry, with the Treasury releasing details of a new package of tax incentives designed to boost industrial production.

The programme, estimated to be worth around $457m, aims to support larger industrial developments by increasing funding for job creation, skills and enterprise development, and energy conservation.

Firms seeking to benefit from the government's new scheme will be assessed on a series of criteria, with points given for being located in an industrial zone and for demonstrating innovative processes and business linkages.

Projects that score five out of 10 in the assessment will be able to deduct 35% of the costs of the investment in manufacturing assets from their taxable income for up to a maximum of R550m ($52m), while those scoring eight or more may deduct 55% of the cost of the investment in manufacturing assets for up to R900m ($85m).

This is welcome news for the manufacturing industry, which saw a 21.8% fall in production quarter-on-quarter for the last three months of 2008 coming hard on the heels of a 9.4% contraction in the third quarter. According to Statistics South Africa (Stats SA), industry contributes 16% of GDP, second only to the services industry.

One of the hardest hit sectors has been the automotive industry, which has seen a dramatic fall in sales in recent months. New vehicle sales in February were down 36.3% compared to the same month in 2008, according to a report issued by the National Association of Automobile Manufacturers of South Africa (NAAMSA) in early March. The drop was the biggest decline in more than 20 years and came on the back of a sharp fall in sales the previous month. Sales for the first two months of 2009 totalled 65,529 units - 36% less than the 102,684 sold in January and February last year.

Vehicle exports in February were also down, dropping 27.5% to 14,949 units, with NAAMSA warning that overall industry export sales could decline by as much as 35% from last year's record of 284,211 vehicles.

The fall in sales has prompted the automotive industry to call on the government to provide an R10bn ($950m) assistance package, and it has proposed such measures as improving access to loan finance and credit, particularly for auto parts producers, and facilitating cash flow for automotive companies.

More challenges arose in March, with a Bloomberg survey reporting that South Africa's industrial production contracted 8% in January. Firms that were forced to cut back on staff and output included South Africa's second-biggest automaker, Volkswagen AG, as well as the continent's largest steel producer, ArcelorMittal South Africa. The steel company announced its utilisation capacity in the last quarter of 2008 had fallen to just 46%, though it was planning to increase this to 65% in the first quarter of 2009.

"The strains of the sharp global growth slowdown on the South African economy are becoming more evident," said Danelee van Dyk, an economist at Standard Bank Group. "The steep decline in exports in January presages further weakness for the manufacturing sector," she told Bloomberg on March 9.

On March 10, the trade and industry minister, Mandisi Mpahlwa, said the government was reviewing tariffs relating to the chemical, aluminium, clothing and textiles industries, which make up a sizeable proportion of industrial production "with a view to reducing the costs of inputs".

The government needs to continue to conduct interventions and work closely with industry so that "as the tide begins to turn, South Africa will be in a better position to take advantages of the opportunities that present themselves", the minister said at an economic briefing.

Though the announcement of these proposals has been welcomed, it will take time before they, or falls in interest rates and inflation, have a noticeable impact on boosting production and stimulating local demand for manufactured goods. Further afield, South Africa's industries, which are among the most competitive on the continent, will be looking for signs of a global recovery to help turn around their recent fall in fortunes.

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