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 002090 
 
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 27 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: 
 -  Inflation Increases Just Under Market Expectations; 
 -  Provinces Failed to Spend Capital Budgets; 
 -  Provincial Capacity for Health and Education Capital 
 Spending Problematic; 
 -  South Africa's Poor Do Save; 
 -  South Africa Plans to Insure Bank Deposits; and 
 -  Housing Market Cools Down. 
 End Summary. 
 
Inflation Increases Just Under Market Expectations 
--------------------------------------------- ----- 
 
¶2. April's Consumer Price Index (CPI) increased 3.4 percent 
(y/y) and CPIX (CPI excluding mortgage costs) by 3.8 percent 
(y/y), just under market expectations of 3.5 and 3.9 
percent, respectively.  The main reasons for April's 
increase are housing, transport, medical care and health 
expenses, and education.  In April, gasoline prices 
increased 40 rand cents/liter, contributing most to the 
increase in transport costs.  This increase in transport 
costs is not expected to be as large in May, as gasoline 
prices only increased by 20 cents/liter.  June's gasoline 
prices are expected to decline, signaling reduced 
inflationary pressure from fuel costs.  Recent rand weakness 
suggests that reductions in interest rates in June are 
unlikely, although CPIX inflation is expected to remain well 
within the 3 to 6 percent targeted range.  The South Africa 
Reserve Bank (SARB) expects CPIX inflation to range between 
4.5 and 5 percent from 2005 through 2007, well within the 
inflation target.  (Standard Bank, CPI Alert and Investec, 
CPIX Update, May 25; SARB Monetary Policy Review, May 2005) 
 
Provinces Failed to Spend Capital Budgets 
----------------------------------------- 
 
¶3. Provincial governments failed to spend nearly R2 billion 
($308 million at R6.5 per dollar) of their R12 billion ($1.8 
billion) total capital budget in the 2004/05 fiscal year. 
The detailed provincial budgets, released by the National 
Treasury, raise concerns about government's ability to 
increase investment spending in key areas.  More than 60 
percent of the national budget is spent through provinces 
and municipalities, with all nine provincial governments 
directing nearly 99 percent of their budgets to core social 
services functions of education, health, and welfare.  The 
Treasury said provinces had controlled their budgets better 
in 2004/05, with only four of the 117 provincial departments 
overspending significantly, compared with 12 in 2003/04. 
However, 26 provincial departments significantly under spent 
their budgets, with Treasury expressing concern that capital 
spending was the largest category with unspent funds. 
Mpumalanga spent only two-thirds of its capital budget, 
while North West, Northern Cape and Free State spent three- 
quarters or less, and Gauteng spent only 85 percent of its 
capital budget.  Capital budgets in the provinces cover 
items such as the hospital revitalization programs and the 
building of new clinics, schools and classrooms, as well as 
infrastructure such as roads and tourism facilities. 
(Business Day, May 20) 
 
Provincial Capacity for Health and Education Capital 
Spending Problematic 
--------------------------------------------- ------- 
 
¶4. Provincial capacity to spend future capital budgets 
appears to be falling short, with education and health 
spending particularly problematic.  Government has budgeted 
for more than R40 billion ($6 billion) in capital spending 
by the provinces over the next three years.  Provincial 
capital spending on education in 2004/05 amounted was nearly 
R30 million ($5 million) lower than in the previous year. 
In health, the absolute decline in capital spending was even 
worse, with provinces spending R438 million ($67 million) 
less than 2003/04.  Mpumalanga and Northern Cape's health 
capital spending were the lowest while KwaZulu-Natal spent 
the most of their allocated health capital budget. 
Provincial spending on social grants showed signs of 
stabilizing, with only KwaZulu-Natal, Eastern Cape, and 
Gauteng overspending their adjusted social grants budgets. 
Overall provincial spending on the core education, health 
and welfare services rose 11.6 percent to R155.5 billion 
($24 billion) in the 2004/05 fiscal year, with social 
development (mainly grants including pensions, disability 
and child support) increasing by 20.6 percent to R50.7 
billion ($7.8 billion), or 26.9 percent of total provincial 
expenditure.  Comprehensive education spending in the nine 
provinces rose only 8.2 percent, to R64.4 billion ($9.9 
billion), while total health spending increased by 7 
percent.  (Business Day, May 20) 
 
South Africa's Poor Do Save 
--------------------------- 
 
¶5. New research examining the expenditure patterns of poor 
households suggests that despite high unemployment, South 
Africa's poor realize the importance of saving for funerals, 
education and emergencies and they try to save.  The goal of 
the research project called Financial Diaries was to present 
a comprehensive picture of the financial inflows and 
outflows of poor households by gathering data on income, 
consumption, savings, lending, and investment.    The 
research was conducted by the Southern African Labor and 
Development Unit at the University of Cape Town and 
sponsored by the Ford Foundation, FinMark Trust, and the 
Micro Finance Regulatory Council.  Interviews were conducted 
every two weeks for a year from 166 black households in 
Langa in Cape Town, Diepsloot in Johannesburg and Lugangeni, 
a rural village in Eastern Cape.  On average, households 
used 17 different financial instruments over the course of a 
year, four savings instruments, two insurance instruments, 
and 11 credit instruments.  Only 38 percent of the poor 
households surveyed used formal, long-term savings 
instruments such as retirement annuities, while 67 percent 
belonged to at least one stokvel (an informal savings group 
where each member contributes a monthly amount and then can 
withdraw once a year) and burial society (an insurance 
program to fund funerals).  One of the problems with 
informal instruments, such as burial societies, is that they 
are not guaranteed or protected.  According to the 
respondents in the study, stokvels are intended as savings 
for a specific item, event, or for emergencies.  More than 
80 percent of the respondents hide money away somewhere in 
their homes, so that it is easily accessible during 
emergencies.  Keeping money at home is seen as more cost- 
effective, as traveling to a bank and using ATMs costs more 
for township and rural dwellers.  However, this form of 
saving is less effective as they are more likely to lend it 
out to neighbors and family relatives, or use it.  The study 
found that although 67 percent of the households surveyed 
had a savings account, it was mainly used for transactions 
rather than a means for long-term accumulation.  Ninety-five 
percent of households pay off some form of debt every month. 
About 24 percent are considered to be highly indebted, with 
average monthly debt payments of 31 percent of monthly 
income.  "Highly indebted" is defined as having average 
monthly debt payments of more than 20 percent of total 
income.  The study found that highly indebted urban 
households made 80 percent of their payments to formal 
financial credit institutions, while their rural 
counterparts paid 71 percent to informal creditors. 
(Business Day, May 24) 
 
¶6. Comment.  As of May 15, 2005, Mzansi low-cost bank 
accounts, aimed at the poor and introduced in October 2004, 
numbered one million.  Over 91% of Mzansi account holders 
have not previously held an account with their current 
institution.  An average of R325 ($50) is held in each 
account.  The current breakdown of Mzansi accounts among the 
five financial institutions is as follows:  Post Bank 28.2 
percent, ABSA Bank 26.9 percent, Standard Bank 22.4 percent, 
First National Bank 15.5 percent, and Nedbank 7 percent. 
End Comment. 
 
South Africa Plans to Insure Bank Deposits 
------------------------------------------- 
 
¶7. Deputy Finance Minister Jabu Moleketi announced plans to 
introduce deposit insurance to South Africa.  Moleketi said 
his department was addressing "regulatory barriers to the 
entry of new players, products and services in the market." 
These included the introduction of the Co-operative Banks 
and the Dedicated Banks Bills, as well as a rewrite of the 
Pensions Fund Act and the introduction of the South African 
deposit insurance plan.  The two bills are designed to 
increase competition in the banking sector by providing a 
framework for new entrants such as community-based banks. 
The bills are scheduled for parliamentary hearings in 
October.  The deposit insurance plan, considered for the 
past three years and intended to avert failures such as 
those of Saambou Bank and Regal Treasury Bank, could result 
in higher bank charges.  The level of deposits that would be 
covered has not yet been finalized, but all depositors would 
be covered up to a certain amount.  Jonathan Dixon, Chief 
Director of Financial Regulation at the National Treasury, 
used a study on competition in the banking sector prepared 
in 2004 for the National Treasury and the Reserve Bank to 
craft new regulations for the financial sector.  The study 
found that disclosure of the cost of banking services was 
weak, the control of the essential infrastructure of the 
payments system was in the hands of the four large banks, 
and that low and middle-income earners faced exceptionally 
high bank charges.  (Business Day and Business Report, May 
25) 
 
¶8. Comment. USAID and U.S. Treasury funded technical 
assistance for both the banking competition study and 
deposit insurance plan. End Comment. 
 
Housing Market Cools Down 
------------------------- 
 
¶9. South African housing experts say that the residential 
property marketing is cooling down.  The total real value of 
building plans passed for residential buildings was down 3.7 
percent in the first quarter of this year, compared with the 
fourth quarter of last year, confirming analysts' 
perceptions about the slowdown in the market.  Absa Bank 
senior economist Jacques du Toit said that according to the 
latest building statistics, released by Statistics SA on May 
18, the total real value of plans passed in the first three 
months of this year was R4.9 billion ($750 million), 
compared with about R5 billion ($770 million) in the last 
quarter of last year.  But he said that year-on-year, the 
total real value of residential building plans passed 
increased slightly, 3.5 percent, compared with the same 
period last year.  However, Du Toit said that this increase 
was small in comparison to the 39.6 percent increase in 2004 
over 2003.  Du Toit said house-price growth was on a 
downward trend and this could probably be ascribed to the 
fact that housing had become less affordable, taking into 
account the high level of house prices, salary and wage 
increases well below 10%, and mildly lower interest rates. 
First National Bank chief economist Cees Bruggemans 
indicated that the boom in the market was not sustainable 
and that the market cool down was not surprising given 
interest rate cuts in 2003 and increased demand in 
residential buying and building activity last year. 
(Business Day, May 26) 
 
FRAZER