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 001887 
 
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 
          May 13 2005 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: 
 -  Barclays Deal Only Waits for Shareholder Approval; 
 -  Reserve Bank to Manage Rand Impact; 
 -  Barclays-ABSA Deal Could Halve Current Account; 
 -  Exchange Reserves Shows Small Change; 
 -  South Africa's Governance High in Some Areas; Less 
 Stable in Others; 
 -  Tourism Charter Announced; and 
 -  South Africa Improves its Competitiveness Ranking. 
 End Summary. 
 
 BARCLAYS DEAL ONLY WAITS FOR SHAREHOLDER APPROVAL 
 --------------------------------------------- ---- 
 
 ¶2.  Britain's Barclays Bank made a final offer of $5.5 
 billion for control of South African bank ABSA, marking 
 its return to South African retail banking and the biggest 
 foreign direct investment in the country.  The deal only 
 awaits shareholder approval expected on June 13.  The UK 
 bank's long-awaited announcement is a major vote of 
 confidence in the South African economy more than a decade 
 after the demise of the apartheid regime and 19 years 
 after Barclays' forced exit from the country.  Britain's 
 third-biggest bank will pay R33 billion in cash for 60 
 percent of ABSA, South Africa's biggest retail lender. 
 After eight months of talks, Barclays is offering R82.5 a 
 share and ABSA will pay its shareholders a dividend of R2 
 a share.  Finance Minister Manuel's approval of the deal 
 confirms that Barclays has agreed to meet the government's 
 conditions to the acquisition.  The conditions, outlined 
 in the National Treasury's statement, are that ABSA remain 
 a locally listed company with its primary listing on the 
 JSE Securities Exchange, and that Barclays maintain ABSA's 
 board make-up in the sense that ABSA's chief executive and 
 the majority of the executive management remain South 
 African citizens.  Barclays has agreed to meet or exceed 
 all the black economic empowerment targets in the 
 financial sector charter, and the South African Reserve 
 Bank will remain the lead regulatory authority for ABSA. 
 The approval represents a shift in the government's "four- 
 pillar" policy.  Manuel said last year that the country 
 maintained a "four-pillar" policy of having a minimum of 
 four big, locally owned banks to ensure effective 
 competition.  However, a National Treasury statement 
 issued on May 8 said approval of the Barclays deal was 
 consistent with the policy.  The four-pillar policy 
 remains in place, with the only difference being that 
 ABSA, as one of the four pillars, will now have a foreign 
 majority shareholder.  Negotiations between the two banks, 
 first made public in September, intensified over the past 
 four weeks.  Malcolm Hewitt, the managing director of 
 Barclays sub-Saharan Africa and Indian Ocean, said that 
 Barclays operated in 12 African countries.  If the ABSA 
 deal went through, it would have a presence in 13 or 14 
 countries.  Barclays initially bid R79 a share and 
 increased its price to win over minority shareholders. 
 After the transaction is sealed, Barclays will make about 
 a third of its profits outside the UK, up from about 20 
 percent now.  The purchase is Barclays' biggest step so 
 far in a plan to double its share of profit from outside 
 Britain to diversify risk and expand in higher-growth 
 markets.  Source:  Business Report, SAPA, Business Day, 
 Reuters, May 9. 
 
 RESERVE BANK TO MANAGE RAND IMPACT 
 ---------------------------------- 
 
 ¶3.  South Africa will seek to ensure that the R33 billion 
 purchase of ABSA Group, the nation's biggest consumer 
 lender, by Barclays would not have a "negative impact" on 
 the rand, Treasury Director-General Lesetja Kganyago said 
 yesterday.  Kganyago said the Reserve Bank "will in the 
 normal course of its business deal with the management of 
 the inflows."  Finance Minister Trevor Manuel told 
 reporters, "what you and I don't know is how much of this 
 transaction has been discounted" in the value of the rand. 
 As Finance Minister he "couldn't take a view on the 
 currency."  Source:  Business Report, May 9. 
 
 BARCLAYS-ABSA DEAL COULD HALVE CURRENT ACCOUNT DEFICIT 
 --------------------------------------------- --------- 
 
 ¶4.  According to ABSA economist Christo Luus, Barclays' 
 proposed acquisition of 60 percent of ABSA could finance 
 half of South Africa's current account deficit for the 
 year.  British bank Barclays has offered about R33bn for a 
 stake in ABSA, while South Africa's current account 
 deficit for 2005 is forecasted at R68 billion.  The 
 anticipated 2005 deficit would be about 4.7 percent of 
 gross domestic product (GDP), which is historically high, 
 Luus said.  Between 1994 and 2004, foreign direct 
 investment (FDI) into the country averaged about R10.7 
 billion a year, or 1.2 percent of annual GDP.  Net FDI was 
 even lower at 0.7 percent of GDP per annum.  Between 1999 
 and 2004, total FDI was R121 billion.  The rand could 
 remain stronger which would contribute towards the 
 inflation target continuing to be met and lessen the need 
 for much higher interest rates.  However, about R1 billion 
 in dividend payments would accrue each year to foreign 
 shareholders, negatively affecting the current account. 
 However by improving domestic business opportunities, 
 investment and growth, the deal may reduce the desire of 
 both resident and foreign shareholders to repatriate 
 dividend income.  South Africa's low ratios of gross 
 domestic saving and gross fixed capital formation as a 
 percentage of GDP (14.9 percent and 15.8 percent, 
 respectively) could therefore be boosted by between one 
 and two percentage points.  Source:  SAPA, May 9. 
 
 EXCHANGE RESERVES SHOWS SMALL CHANGE 
 ------------------------------------ 
 
 ¶5.  The South African Reserve Bank (SARB) continued its 
 conservative purchasing of foreign reserves in April, 
 increasing by $156 million.  Total reserves now amount to 
 $14.3 billion.  Analysts were keeping an eye on the 
 figures to see if sterilization of the inflow of foreign 
 exchange from the Barclays-ABSA deal had already begun, 
 but the relatively small increase in foreign exchange 
 reserves suggests that it has not.  When Finance Minister 
 Trevor Manuel announced on Sunday that the deal had 
 received regulatory approval, SARB Deputy Governor Xolile 
 Guma said the dollar proceeds would be absorbed into 
 official reserves to minimize disruption to local 
 financial markets.  Economists now expect this month's 
 figures to show a large rise in foreign exchange reserves, 
 reflecting the Bank's purchase of dollars flowing in from 
 the deal, which would otherwise cause an unwelcome 
 strengthening of the rand.  The latest figures suggest 
 that, even though the Bank had indicated its preference 
 for a more competitive rand and expressed concern about 
 the effect of its strength on certain economic sectors, it 
 was not seeking to influence the rand's value through more 
 aggressive reserves buying.  Source:  Reuters and Business 
 Day, May 10. 
 
 SOUTH AFRICA'S GOVERNANCE HIGH IN SOME AREAS; LESS STABLE 
 IN OTHERS 
 --------------------------------------------- ------------ 
 
 ¶6.  The World Bank issued its latest "Governance Matters" 
 report comparing governance indicators among 209 
 countries.  Six components of good governance are 
 highlighted:  (1) voice and accountability, measuring 
 political, civil and human rights; (2) political 
 instability and violence, measuring the likelihood of 
 violent threats to, or changes in, government, including 
 terrorism; (3) government effectiveness,  measuring the 
 competence of the bureaucracy and the quality of public 
 service delivery; (4) regulatory burden, measuring the 
 incidence of market-unfriendly policies; (5) rule of law, 
 measuring the quality of contract enforcement, the police, 
 and the courts, including judiciary independence, and the 
 incidence of crime; and (6) control of corruption, 
 measuring the abuse of public power for private gain, 
 including petty and grand corruption.  According to the 
 report, South Africa is slightly less politically stable 
 than most other countries.  However, in other areas of 
 governance South Africa remains well above the world 
 average with a significant improvement in the category of 
 government effectiveness over the past seven years.  The 
 report places countries in categories which reflect their 
 variation above or below the world average.  South 
 Africa's political stability is placed at -0.24, below the 
 world average of 0, the same as Argentina.  At one end of 
 the scale, Iraq is at -2.87 in terms of political 
 stability, Zimbabwe at -1.86. The U.S. is at 0.47, and at 
 the opposite end of the spectrum, the Caribbean island of 
 St Kitts and Ben Nevis is at 1.41.  While the bank said 
 that some of its more than 350 data sources on more than 
 209 countries were based on perceptions, they constituted 
 important sources of information.  In its assessment of 
 political stability, South Africa has moved considerably 
 closer to the world average since 1996, largely due to a 
 drop in political violence.  The categories where South 
 Africa scored towards the top of the first two quartiles 
 above average include: voice and accountability; 
 government effectiveness; the regulatory burden on 
 business; the rule of law; and control over corruption. 
 However from 1996 to last year, it slipped slightly in the 
 areas of the rule of law and control of corruption. 
 Source:  Business Day, May 10. 
 
 TOURISM CHARTER ANNOUNCED 
 ------------------------- 
 
 ¶7.  Environment and Tourism Minister Marthinus van 
 Schalkwyk announced a black economic empowerment (BEE) 
 charter for tourism that would encourage increased BEE 
 ownership.  A survey done in 2003 showed there was an 
 average of only six percent BEE ownership in the tourism 
 industry.  The charter has seven broad indicators 
 including ownership, strategic management, employment 
 equity, skills development, preferential procurement, 
 enterprise development and social development.  It also 
 contains measurement tools to help participants in the 
 industry identify their current BEE levels and how to 
 improve their ratings.  The charter will apply to every 
 single enterprise in the tourism value-chain.  All 
 businesses with an annual revenue of less than R5 million 
 ($820,000, using 6.1 rands per dollar) will be exempt from 
 the ownership requirements, although the six other 
 empowerment targets will still apply.  Being rated would 
 not be compulsory but there would be incentives to 
 implementing the BEE targets.  Ratings would be used by 
 government in determining spending partners and for 
 investment and development funding allocations.  The 
 charter would be implemented over two periods -- the first 
 for the five years to 2009 and the second during the 
 period to 2014.  The BEE ownership target for 2014 was 30 
 percent.  Van Schalkwyk said a BEE Council would be 
 established and the transformation charter would be filed 
 by August 1.  Source:  SAPA and Business Report, May 9. 
 
 SOUTH AFRICA IMPROVES ITS COMPETITIVENESS RANKING 
 --------------------------------------------- ---- 
 
 ¶8.  The World Competitiveness Yearbook, compiled by Swiss 
 business school the Institute for Management Development, 
 ranks the 60 most influential world economies.  The 2005 
 Yearbook ranked South Africa at 46th position, reversing a 
 trend that saw its rating decline from a peak of 37th in 
 2001 to 49th in 2004.  The report warned that South 
 Africa's high unemployment and HIV/AIDS rate remained the 
 biggest obstacles to improving its ranking, emphasizing 
 the need for greater urgency in government's efforts to 
 encourage labor force participation.  Although South 
 Africa was rated last of the 60 countries when it came to 
 unemployment, it rated second when it came to job growth. 
 Since only 25 percent of the population was working, this 
 job creation came off a low base.  By contrast, 58 percent 
 of Germany's and 46 percent of the UK's populations were 
 employed.  The list was headed by the U.S., Hong Kong and 
 Singapore, while China dropped seven places to 31st, due 
 to a negative opinion survey conducted in the business 
 community.  South Africa's best performance was in the 
 area of government efficiency, where it was ranked at 
 32nd, higher than countries such as Germany, India, Japan, 
 Belgium and France.  Its poor infrastructure ranking 
 lowered the overall score where South Africa ranked 58th, 
 down from 56th last year, above only Mexico and Indonesia. 
 Source:  Business Day, May 12. 
 
FRAZER