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UNCLAS SECTION 01 OF 04 PRETORIA 002492 
 
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 
          June 24 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: 
 
 -  Spark of Hope for Stalled U.S.-SACU Free Trade Talks; 
 -  Current Account Deficit Narrows, Inflows Plunge; 
 -  Wolfowitz Urges SA Business to Play Lead Role in 
 Africa; 
 -  Barclays Given More Time to Seal the ABSA Deal; 
 -  Competition Commission to Probe How Banks Justify High 
 Fees; 
 -  JSE Wants Companies with SA Assets to 'Come Home'; 
 -  Red Tape Curbs Growth in Key Sectors; and 
 -  Building Plans and Completions on the Rise. 
End Summary. 
 
Spark of Hope for Stalled U.S.-SACU Free Trade Talks 
--------------------------------------------- ------- 
 
¶2. South Africa, along with its Southern African Customs 
Union (SACU) partners, and the United States have finally 
agreed to meet on July 1 in Geneva to rescue free-trade 
talks that ran aground a year ago.  Negotiators on both 
sides have been unable to agree to a meeting for the past 
six months.  However, the Geneva meeting also does not mark 
the restart of negotiations.  South Africa's chief 
negotiator, Xavier Carim, said it would be an exploratory 
meeting to find a way forward.  South Africa's acting Trade 
and Industry Director-General, Tshediso Matona, and Deputy 
U.S. Trade Representative Josette Shiner are expected to 
attend the meeting.  Business in South Africa hopes that the 
free-trade agreement between SACU and the United States will 
permanently lock-in the temporary duty-free access that 
South African exporters enjoy in the U.S. market under the 
African Growth and Opportunity Act (AGOA).  A South African 
trade commentator said the U.S. had a free trade "template" 
that it applied in most of its free trade negotiations with 
various countries and regions.  He said SACU, whose member 
countries were in various stages of development, did not fit 
the template and they expected the United States to be more 
flexible.  Source: Business Day, June 22. 
 
¶3. Comment:  This announcement comes on the heels of the 
June 1 Bush-Mbeki meeting in Washington and Tom Donohue's 
(President and CEO of the U.S. Chamber of Commerce) call for 
South Africa's government to speed up the signing of a free 
trade agreement with the United States, saying this would 
signal that South Africa was serious about attracting 
foreign investment. End Comment. 
 
Current Account Deficit Narrows, Inflows Plunge 
--------------------------------------------- -- 
 
¶4. South Africa's current account deficit narrowed slightly 
in the first quarter of 2005 but capital inflows fell 
sharply, raising the prospect of further pressure on the 
rand that could hurt the inflation outlook.  The plunge in 
capital inflows comes against the backdrop of recent rand 
weakness and a surge in oil prices, some of the factors 
cited by the Reserve Bank as risks to the inflation outlook 
when it left interest rates unchanged early in June. 
Analysts said foreigners appeared to be scaling down 
portfolio investment in response to lower domestic interest 
rates.  In its June quarterly bulletin, which painted a 
mixed picture, the Reserve Bank said the surplus on the 
financial account fell by more than half to R11.7 billion 
($1.8 billion) in the first quarter from R31.4 billion ($4.8 
billion) in the last three months of 2004.  Capital inflows 
are financing the deficit on the current account deficit 
which narrowed to R54.5 billion ($8.4 billion) at 3.8% of 
gross domestic product (GDP) in the first quarter of 2005. 
The shortfall on the current account was R57.3 billion ($8.8 
billion) or 4% in the fourth quarter of 2004--its biggest 
ratio in 22 years.  Analysts are concerned about the drop in 
capital inflows, largely the result of lower interest rates 
making South African assets less attractive to some 
investors.  The rand, which has depreciated about 17% so far 
in 2005 against the dollar, was put under pressure by dollar 
strength and a narrowing interest rate differential with the 
United States.  CPIX (inflation less mortgage costs) 
inflation, targeted by the bank for monetary policy, has 
been inside the target range of 3% to 6% for 20 consecutive 
months. It rose by an annual rate of 3.8% in April from 3.6% 
in March.  In a positive development, the Reserve Bank said 
foreign direct investment (FDI) into the country swung to an 
inflow of R1.3 billion ($200 million) in the first three 
months of 2005 from an outflow of R5 billion ($800 million) 
in the fourth quarter of 2004.  First quarter 2005 GDP 
growth slowed slightly to 3.5%, down from 4% in the last 
quarter of 2004, due to a decrease in household and 
government spending.  GDP forecasts for 2005 are still 
predicting annual growth between 3.5% and 4%.  Sources: 
Business Day, June 23; Nedbank, Investec, and Standard Bank 
Economic Research, June 23. 
 
Wolfowitz Urges SA Business to Play Lead Role in Africa 
--------------------------------------------- ---------- 
 
¶5. World Bank President Paul Wolfowitz has come out strongly 
in support of South Africa playing a leading economic role 
in Africa, saying South African business and the bank should 
form a partnership to boost development in the region. 
Wolfowitz said local firms were already uniquely positioned 
for public-private infrastructure projects in the region. 
According to research analysts Liquid Africa, South Africa 
is now the largest source of foreign direct investment in 
Africa, far outpacing the U.S., U.K., and France.  Wolfowitz 
said if South Africa and the Bank "partner together we can 
probably increase our respective effectiveness and we have a 
huge interest in seeing that this part of the world makes 
progress."  President Thabo Mbeki is also keen to align 
South Africa's economic needs with those of the rest of the 
continent and has been at the forefront of efforts to boost 
trade links across Africa.  Wolfowitz met Mbeki in South 
Africa on June 18.  Wolfowitz also had lunch with a number 
of prominent business figures, including Lazarus Zim, CEO of 
Anglo American in South Africa, Safika group chairman Saki 
Macozoma, AngloGold CEO Bobby Godsell and Transnet CEO Maria 
Ramos.  Source: Business Day, June 21. 
 
¶6. Comment:  Prior to the Wolfowitz visit, Finance Minister 
Trevor Manuel made a public plea for African National 
Congress (ANC) allies to rethink their opinions on World 
Bank loans.  The possibility of large-scale borrowing by 
South Africa was raised in an ANC discussion document on 
economic policy released last month.  The paper has become a 
source of controversy between the ANC and the Congress of 
South African Trade Unions (COSATU) and the South African 
Communist Party (SACP) because its recommendation for an 
easing of labor laws proposes a massive infrastructure 
investment program, which would partly be financed by 
borrowing from the World Bank.  COSATU and the SACP warn 
against agreeing to World Bank political conditions in 
exchange for loans.  Since 1994, South Africa has only taken 
two small World Bank loans. End Comment. 
 
Barclays Given More Time to Seal the ABSA Deal 
--------------------------------------------- - 
 
¶7. U.K. bank Barclays has been granted an additional two 
weeks to buy up to 60% of South African bank ABSA.  On June 
21, the high court approved Barclays' request to postpone 
sanction of the scheme of arrangement to buy 32% of ABSA's 
shares at R82.50 ($13) each.  ABSA shareholders voted 90% in 
favor of the offer on June 13.  However, the scheme hinges 
on Barclays' success in buying a further 28% of ABSA under a 
voluntary offer.  The U.K. bank has now extended this offer 
to July 22.  As of June 21, Barclays had commitments from 
shareholders for 51.1% of ABSA.  Barclays' spokeswoman Liz 
Hooper said the bank was confident it would secure the 
shares it required.  She said Barclays had extended the 
offer to give shareholders more time to tender shares 
following ABSA's R2 ($0.31) dividend payment.  Barclays 
hopes to secure up to 60% of ABSA's shares, but has set a 
floor of 56.5% to ensure it retains control of the bank once 
ABSA's Black Economic Empowerment partner, the Batho Bonke 
consortium, exercises options to buy 10% in the bank. 
Source: Business Day, June 14 and 22. 
 
Competition Commission to Probe How Banks Justify High Fees 
--------------------------------------------- --------- 
 
¶8. The high fees that South African banks charge clients are 
back in the spotlight, with the Competition Commission 
preparing the groundwork for a possible investigation of the 
competitiveness of bank charges.  Last week, the Commission 
confirmed it was tendering for a private company to conduct 
a scoping study into the national payments system and bank 
charges.  The scoping study, which could lead to a formal 
investigation, could help make the payments system more 
transparent and show consumers how banks arrive at the 
charges they impose on customers.  The Competition in 
Banking Report conducted on behalf of the National Treasury 
and the Reserve Bank last year, found that disclosure of the 
cost of banking services was weak, that the control of the 
essential infrastructure of the payments system was in the 
hands of the four large banks.  The result was that low- and 
middle- income earners faced exceptionally high bank 
charges.  One industry source says that banks have come to 
rely too heavily on the income they earn from fees rather 
than lending.  Last year, most banks saw significantly 
larger increases in noninterest than in interest income. 
Ross Jenvey at Andisa Securities says falling interest rates 
have put pressure on banks' interest margins, explaining the 
slower growth in interest income.  He says the strong rise 
in noninterest income is due to growth in volumes rather 
than price increases, with Standard Bank and FirstRand Bank 
growing banking fees and commissions about 24% last year. 
Source: Business Day, June 14. 
 
¶9. Comment: The U.S. Agency for International Development 
(USAID)/South Africa funded the Competition in Banking 
Report. End Comment. 
 
JSE Wants Companies with SA Assets to 'Come Home' 
--------------------------------------------- ---- 
 
¶10. A top JSE Securities Exchange SA official lashed out at 
companies with South African assets that seek to list on 
bourses in cities such as London and Toronto, rather than on 
the local exchange.  The frustration, expressed yesterday by 
JSE business development manager Noah Greenhill, comes more 
than a year after Finance Minister Trevor Manuel changed the 
law to allow foreign firms to launch a secondary listing on 
the JSE.  But this has yielded minimal results--to date only 
Australia's Aquarius Platinum has listed on the JSE. 
Greenhill asked yesterday why foreign companies doing 
business in South Africa would not choose to raise capital 
through the JSE, and would instead list their assets 
overseas.  Greenhill's comments came during a function at 
which Platinum Group Metals SA, which mines platinum near 
Rustenburg, said it had been upgraded to the main board of 
Canada's Toronto Stock Exchange due to the strength of its 
local platinum assets.  Platinum Group Metals is based in 
Canada even though its main platinum assets are South 
African.  It is not listed on the JSE, but is considering a 
secondary listing on the JSE.  Greenhill said that it was 
time for the company to "come home (as it) is an African 
company, and a South African company."  He said a number of 
parties bore the responsibility to change this perception 
and draw more companies to South Africa.  But despite the 
lag in getting companies to list on the local bourse, 
Greenhill said he expected "about 10" companies to list on 
the JSE before the end of the year "if all goes according to 
plan."  He said these companies were a combination of 
African and overseas outfits, with turnover (i.e., revenue) 
ranging from R30 million ($4.6 million) to "many billions." 
These included companies across a spectrum of sectors, but 
predominantly from the mining industry.  Source: Business 
Day, June 14. 
 
Red Tape Curbs Growth in Key Sectors 
------------------------------------ 
 
¶11. Companies operating in four key sectors of South 
Africa's economy--automotive, clothing and textiles, 
pharmaceuticals and tourism--are burdened with significantly 
more regulatory red tape than others, a study has found. 
Tourism emerged as the most regulated sector, with 
compliance costs as a percentage of turnover (i.e., revenue) 
higher than in any of the other sectors surveyed.  Tourism 
is widely considered the most important sector of the 
domestic economy in terms of its potential to spur economic 
growth and job creation, so this finding will be of great 
concern to government.  The survey results are also expected 
to bolster the lobby within the African National Congress 
(ANC) that has suggested deregulating the South African 
labor market to encourage job creation.  The issue will be 
hotly debated at the ANC's policy conference later this 
month.  The study, commissioned by Small Business Project, a 
nonprofit research and development organization, and carried 
out by Lawrence Schlemmer's MarkData group, covered a 
representative sample of 1,800 businesses from the informal, 
small and medium-size enterprises and corporate sectors. 
Source: Business Day, June 21. 
 
Building Plans and Completions on the Rise 
------------------------------------------ 
 
¶12. The real value of building plans completed rose by 48.8% 
year-on-year (y/y) in April 2005 to 1.421 billion (all 
figures in 2000 rands) after rising by 31.1% y/y to R1.453 
billion in March 2005, according to Statistics South Africa. 
The real value of approved building plans mirrored the 
building plan completion trend by rising 80.6% y/y in April 
2005 to R3.5 billion compared with a 28.4% y/y increase in 
March 2005 to R3.3 billion.  This brought the increase for 
the first four months to 33.3% y/y, which is almost the same 
as last year's 33.0% increase after only an 11.3% rise in 
¶2003.  South Africa is currently experiencing a housing boom 
with South African house prices increasing by 32.2% in 2004 
compared with 21.4% y/y in 2003 and 15.2% y/y in 2002 
according to South African commercial bank ABSA's (ASA) 
monthly House Price Index (HPI).  Source: I-Net Bridge, June 
¶17. 
 
FRAZER