This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PRETORIA 004784 
 
SIPDIS 
 
DEPT FOR AF/S/JDIFFILY; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR OAISA/BARBER/WALKER/JEWELL 
USTR FOR COLEMAN 
LONDON FOR GURNEY; PARIS FOR NEARY 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT:  SOUTH AFRICA ECONOMIC NEWSLETTER 
           OCTOBER 29, 2004 ISSUE 
 
 
¶1. Summary.  Each week, AMEmbassy 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: 
 -  New Bank Account Aimed at Poor; 
 -  Mid Term Expenditure Framework Submitted to Parliament; 
 -  Consumer Inflation Subdued; 
 -  European Firm Survey Optimistic on SA Economy; 
 -  Producer Prices Remain Low 
 End Summary. 
 
New Bank Account Aimed at Poor 
------------------------------ 
 
 
¶2.  South African banks introduced a new national banking 
 account, Mzansi, aimed at attracting the over 13 million 
 South Africans not participating in the formal financial 
 sector.  The government's goal of banking the 'unbanked' 
 population drove this low-cost account via the Black 
 Economic Empowerment (BEE) financial services charter. 
 Government hopes to reach this goal by encouraging banks 
 to lower their historically high bank charges and increase 
 the number of ATMs and branches in lower-income areas. 
 Charges for the Mzansi account vary between banks and 
 range from 30 percent to 60 percent less than charges on 
 previous account offerings.  Typical bank charges for 
 Mzanzi accounts include ATM cash withdrawals and cash 
 deposits, with each bank charging different amounts.  The 
 bank charges for ATM cash withdrawals range between R3.25 
 ($0.52, using 6.2 rands per dollar) and R5 ($.81).  Bank 
 charges for cash deposits range from R4 ($0.65) to R10.75 
 ($1.73).  Other types of charges also vary by bank.  FNB 
 charges the lowest rates for using the Mzansi card as a 
 debit card to pay for goods, while ABSA bank charges no 
 fee to open a new account, has no minimum balance 
 requirements, and does not charge for failed transactions 
 when funds are inadequate.  A deposit of R20 ($3.23) is 
 required to open an account, and some banks require a 
 minimum account balance as well.  South African banks 
 pooled their infrastructure costs of establishing Mzansi 
 accounts, which means that 12,000 ATMs are available to 
 every Mzansi account holder.  So far, the big four South 
 African banks and Postbank, the post office's savings 
 institution, are the only one offering the Mzansi account. 
 Source:  Business Day and Business Report, October 26. 
 
MID TERM EXPENDITURE FRAMEWORK SUBMITTED TO PARLIAMENT 
--------------------------------------------- --------- 
 
¶3.  Every October, the Finance Minister presents the 
 Medium Term Budget Policy Statement (MTBPS), which 
 highlights the South African budget framework for the next 
 three years.  MTBPS updates economic growth and revenue 
 and expenditure forecasts and suggests potential policy 
 changes that would support the government's key 
 priorities.  Key highlights of Finance Minister Trevor 
 Manuel's speech included:  (1) relaxation of foreign 
 exchange controls on South African corporations; (2) an 
 additional R50 billion ($8 billion) aimed at poverty 
 alleviation, infrastructure improvements and increased 
 wages of teachers and police; (3) no substantial tax 
 changes; and (4) increased budget deficit in 2005/6, 
 rising to 3.5 percent of GDP compared to 3.2 percent in 
 2004/05.  GDP forecasted growth for the next two years 
 were revised, reaching 3.9 and 3.7 percent 2005 and 2006, 
 compared to February 2004's forecasts of 3.6 and 4 percent 
 respectively.  Fiscal policy continues to remain slightly 
 expansionary in the short term.  In FY 2005, the deficit 
 as a percentage of GDP should reach 3.2 percent and then 
 gradually decline to 2.5 percent by FY2007, as revenues 
 should increase by 10 percent and expenditures by 9 
 percent over the two-year period.  High growth in social 
 services spending puts increasing pressure on government 
 expenditures.  Welfare and social security spending 
 (including child support, disability and elderly grants) 
 constitute the fastest growing share of overall 
 expenditures, increasing from 18.6 percent of total 
 government expenditures in FY 2004 to 20 percent by 2007. 
 Health spending shares will remain relatively constant at 
 12.5 percent in FY2004 and reaching 12.6 percent by 2007. 
 Little change in tax policy was announced.  Gross tax 
 revenue for 2004/05 is expected to be R1.9 billion higher 
 than the February 2004.  Corporate taxes are expected be 
 R6.2 billion less than budgeted, higher value added and 
 personal tax revenues offset weaker corporate tax 
 collections.  The inflation rate, consumer prices 
 excluding mortgages (CPIX) remains well within the 
 targeted 3-6 percent range at 5 percent over the next 
 three years.  Source:  Business Day and Business Report, 
 October 27; Standard Bank's MTEF Alert, October 26. 
 
¶4.   Comment.  The most unexpected announcement was the 
 relaxation of exchange rate controls for corporations. 
 The present rules limits offshore investments to R2 
 billion per project for investments in Africa and R1 
 billion elsewhere, in addition to 20 percent of the excess 
 cost.  Now, the limits on outward investments by local 
 corporations and restrictions on the repatriation for 
 foreign dividends are removed as well as restrictions on 
 individuals to invest in foreign firms listed on the South 
 African exchanges.  Even though there are no restrictions 
 on corporations' foreign direct investment, corporations 
 will still be required to apply to the Reserve Bank for 
 approval.  Limits on pension funds, insurance companies, 
 mutual funds (unit trusts) and individuals are still in 
 place but expectations are that they will be removed soon. 
 More relaxed exchange controls for corporations should 
 help the government's goal of investment reaching 25 
 percent of GDP by 2014.  End Comment. 
 
CONSUMER INFLATION SUBDUED 
-------------------------- 
 
¶5.  In September, consumer prices increased 1.3 percent 
 (y/y) slightly higher than August's y/y increase of 1 
 percent, and consumer prices excluding mortgages (CPIX) 
 increased 3.7 percent well within the market expectations 
 of 3.9 percent.  Increases in transport and food explained 
 much of September's increase in prices while declines in 
 housing and medical care and expenses offset the sharp 
 increase in transport expenses.  Administered prices 
 (price set by either government or official regulatory 
 body rather than the market) continued to show strong 
 growth, increasing by 7.4 percent in September.  Food 
 inflation increased of 1.6 percent annually compared to 
 1.4 percent in August.  So far, rain in South Africa has 
 not been sufficient to plant, although increased imports 
 can increase domestic food supplies.   Rising food costs 
 and oil prices are potential future risks, although the 
 current rand strength will mitigate the impact of 
 increased inflation coming from imports.  Source: 
 Standard Bank CPI Alert, October 27; Statistics SA Release 
 P 0141.1 and Discussion Document, Administered Prices 
 September 2004. 
 
EUROPEAN FIRM SURVEY OPTIMISTIC ON SA ECONOMY 
--------------------------------------------- 
 
¶6.  The Bilateral Chamber Consultative Committee, an 
 informal group of business chambers representing about 
 3000 foreign companies with more than R360 billion ($58 
 billion) investments in South Africa conducted a survey 
 among 252 of its member companies from May to June 2004 
 and its findings were presented to Parliament's Trade and 
 Industry Portfolio Committee.  Germany, France, the UK, 
 Italy, Sweden, the Netherlands and Finland were 
 represented in the survey.   Of the companies that 
 responded, 59 percent said developments in Zimbabwe had 
 affected their businesses, while 79 percent rated 
 government's HIV/AIDS policy as "bad to very bad".  In the 
 recent survey, 78 percent of respondents found the economy 
 to be satisfactory to excellent, compared with 31 percent 
 in 2002, and 95 percent expected it to remain the same or 
 improve.  Sixty percent felt that investment would 
 increase and 47 percent had created new jobs.   Fourteen 
 percent of firms indicated intentions to disinvest, citing 
 this as a natural process within globalization.  A 
 reasonable return on investment, cheap electricity and a 
 competitive marketplace were some of the positive economic 
 features cited, though the rand's volatility had caused 
 problems.  Levels of confidence in the government had 
 strengthened considerably, with 53 percent expressing 
 increased confidence, compared with only 32 percent in 
 ¶2002.  Relative confidence was expressed in the future of 
 a market-driven economy (70 percent), balanced taxation 
 (53 percent), democracy (46 percent), political leadership 
 (34 percent), and equal opportunities for foreign business 
 (32 percent).  However, significant concern was expressed 
 over corruption, the competence of the civil service, 
 inflexible labor regulations and crime and violence. 
 There was strong pessimism about the accountability of 
 trade unions, labor productivity, investment incentives, 
 and the free transfer of funds out of South Africa.  While 
 the survey findings were positive in many areas, some ANC 
 Members of Parliament, including committee chairman Ben 
 Martins, latched on to the negative perceptions and 
 expressed skepticism about its objectivity and the 
 validity of the findings, questioning the reasons for 
 including question about Zimbabwe on the survey and 
 arguing that Zimbabwe was no different to any other 
 African country.  Source:  Business Day, October 25. 
PRODUCER PRICES REMAIN LOW 
-------------------------- 
 
¶7.  The producer price index (PPI) increased 1.4 percent 
 in September, lower than the Reuters consensus view of 1.8 
 percent.  The main contributors to September's rise were 
 increases in the prices of petroleum and coal products as 
 well as the prices of basic metals.  While oil prices are 
 still high, the rand maintained its strength, averaging 
 R6.5 per dollar in September.  The rand has strengthened 
 further in October, offsetting some of the inflationary 
 impact of rising oil prices.  Domestic producer prices 
 increased by 2.4 percent while imported producer prices 
 declined by 1.7 percent.  Lower electricity prices, 
 declining by 28 percent as Eskom switched from higher 
 winter prices to summer, contributed to September's 
 moderation in producer inflation.  Source:  Business 
 Report, October 29; Standard Bank PPI Alert, October 29. 
 
FRAZER