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UNCLAS SECTION 01 OF 04 PRETORIA 003588 
 
SIPDIS 
 
DEPT FOR AF/S/KGAITHER; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR OAISA/BARBER/WALKER/JEWELL 
USTR FOR COLEMAN 
PARIS FOR NEARY 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT:  SOUTH AFRICA ECONOMIC NEWSLETTER 
         September 2 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: 
 -  Money Supply and Credit Growth Discourage Future 
 Interest Rate Reductions; 
 -  South Africa and Nigeria Want to Expand Trade; 
 -  Six Percent GDP Growth Target Difficult to Achieve; 
 -  Study on Farm Evictions Presented to Parliament; 
 -  Microlending Expected to Increase; 
 -  Study Asserts Microlenders' Loans too Small to Bring in 
 Profit; 
 -  Banking Study Highlights High Cost to Poor; and 
 -  July Tax Revenue Collection Stronger than Planned. 
 End Summary. 
 
 MONEY SUPPLY AND CREDIT GROWTH DISCOURAGE FUTURE INTEREST 
 RATE REDUCTIONS 
 --------------------------------------------- ------------ 
 
 ¶2.  Growth in money supply and private sector credit 
 extension (PSCE) increased above market forecasts in July, 
 reducing hopes that the South African Reserve Bank (SARB) 
 will lower interest rates later in 2005.  The larger than 
 expected expansion in money supply and the extension of 
 credit by commercial banks to the private sector was 
 related to the proceeds from the Barclays-ABSA acquisition 
 and the country's lowest interest rates in 24 years. 
 According to figures released by the SARB, the broad 
 measure of money supply (M3) increased 19.9 percent in 
 July (y/y), up from 17.1 percent in June.  The increase 
 was far higher than market expectations of 17.8 percent. 
 In the year to July, private sector credit demand 
 increased 23.5 percent, compared June's increase of 22 
 percent. 
 
 ¶3.  The larger than anticipated rise in M3 was mainly due 
 to increases in net foreign assets and credit extended by 
 banks to the private sector.  The value of the net foreign 
 assets rose to R33.3 billion in July compared to R18.7 
 billion in June and the value of credit extended by banks 
 to the private sector increased by R11.7 billion from 
 June's R7.4 billion.  Economists speculate that the July 
 increase in net foreign assets represents part of the 
 proceeds of the Barclays acquisition of ABSA.  Barclays 
 paid R28 billion for a 54 percent stake in South Africa's 
 biggest retail bank, ABSA.  The acquisition by Barclays is 
 the largest single foreign direct investment in South 
 Africa's history. 
 
 ¶4.  July's private sector credit extension (PSCE) 
 increased 23.5 percent.  Consensus forecasts in a Reuters 
 poll expected private sector credit demand to increase by 
 22.5 percent.  Household debt is expected to rise over the 
 next few months from its current levels of about 61 
 percent as a percentage of GDP in the second quarter 2005. 
 Mortgage advances were again the main contributor to the 
 strong PSCE figures, up 27.3 percent (y/y), reaching R10.4 
 billion.  Source:  I-Net Bridge, Reuters, Standard Bank 
 Money Supply Alert, August 30; Business Report and 
 Business Day, August 31. 
 
 SOUTH AFRICA AND NIGERIA WANT TO EXPAND TRADE 
 --------------------------------------------- 
 
 ¶5.  On August 24, a three-day Nigeria and South Africa 
 Business Investment Forum 2005 commenced with hopes of 
 encouraging South African entrepreneurs to establish 
 stronger trading relationships with Nigeria.  Over 300 
 delegates were in attendance at the forum.  Nigeria's 
 ambassador to South Africa, Tunji Olagunju, said Nigeria 
 is South Africa's biggest trading partner in West Africa 
 and its third largest on the continent after Mozambique 
 and Zimbabwe; however, most of Nigeria's trade is with 
 Europe and North America.  Figures provided by Nigeria 
 indicate that the value of South Africa's exports to the 
 country increased from $45 million in 1998 to $456 million 
 (R3 billion) in 2004.  Imports have increased from $76 
 million in 1998 to $800 million in 2004, with oil 
 accounting for most of the increase.  Nigeria is also 
 planning to hold investment forums in China, India, the 
 U.S., Russia, Ukraine and the United Arab Emirates. 
 ¶6.  South African firms that have established a presence 
 in Nigeria include leading supermarket chain Shoprite and 
 telecommunications firm MTN, which now claims to have 6.3 
 million cell phone subscribers in the West African state. 
 In an effort to attract investors, Nigeria may offer a 
 five-year tax holiday to firms locating in the country and 
 a seven-year tax holiday to companies that locate 
 themselves in underdeveloped regions. 
 
 ¶7.  As Nigeria seeks to attract additional business 
 investment, it must address corruption.  Last year, the 
 Berlin-based corruption watchdog Transparency 
 International rated Nigeria as the third worst of states 
 surveyed for its annual corruption perceptions index. 
 This study ranks countries according to the levels of 
 graft that are believed to exist there. Of the 146 nations 
 evaluated, only Bangladesh and Haiti fared worse than 
 Nigeria.  Source:  SAPA, IPS Business Report, August 30. 
 
 SIX PERCENT GDP GROWTH TARGET DIFFICULT TO ACHIEVE 
 --------------------------------------------- ----- 
 
 ¶8.  Leading South African economists questioned whether 
 the government's 6 percent growth target was achievable, 
 given high oil prices, low domestic savings and skills 
 base.  Dave Mohr, Citadel's chief economist, and Azar 
 Jammine, Chief Economist at Econometrix, were two of the 
 economicsts that have expressed these doubts.  Mohr 
 asserted that relying on high asset prices, high consumer 
 spending and sound monetary and fiscal policies might not 
 be enough to sustain growth above 4 percent.  According to 
 Mohr, the reasons for the higher growth in the South 
 African economy during the mid to late 1990s were no 
 longer in place.  The benefits of financial stabilization 
 policies established in the second half of the nineties 
 led to a one-time increase in growth.  Mohr was 
 pessimistic about whether high commodity prices were 
 sustainable and thought that capital inflows were 
 financing demand rather than higher levels of production. 
 Mohr saw little chance of South Africa increasing domestic 
 savings and foreign direct investment enough to sustain 6 
 percent growth.  Azar Jammine emphasized South Africa's 
 poor skills base as the primary reason why six percent 
 growth was not sustainable.  Source:  Business Report, 
 August 31. 
 
 STUDY ON FARM EVICTIONS PRESENTED TO PARLIAMENT 
 --------------------------------------------- -- 
 
 ¶9.  More black workers and their families have been 
 evicted from white farms since 1994 than in the 10 years 
 before 1994, according to Marc Wegerif of the Nkuzi 
 Development Association (NDA).  Wegerif briefed the 
 Agriculture and Land Affairs Committee in Parliament on 
 the findings of a national evictions survey.  The study, 
 which covered the period from 1984 to 2004, was the first 
 to quantify the number of people evicted from farms in 
 South Africa.  An estimated 737,114 people had been 
 evicted between 1984 and the end of 1993.  From 1994 to 
 2004, a further 942,303 people had been evicted.  Since 
 1984, 2.5 million people voluntarily departed the farms 
 where they had been residing and 1.7 million were evicted. 
 Almost half of those evicted were children, of which 
 46,748 had been laborers while living on the farms.  The 
 number of child laborers has dropped substantially since 
 ¶1994.  Wegerif said the main reason for the evictions was 
 economic.  Wegerif said the study demonstrated a clear 
 link between the number of evictions in a particular year 
 and events such as droughts or the introduction of minimum 
 wage legislation.  Over two-thirds (67.3%) of those 
 evicted ended up in urban centers, mainly in Gauteng and 
 KwaZulu-Natal.  Wegerif stressed the study was "not 
 intended as an attack on government policies" but at least 
 two members noted that government policy was failing South 
 Africa's farm workers.  Source:  Cape Times and Business 
 Day, August 31. 
 
 MICROLENDING EXPECTED TO INCREASE 
 --------------------------------- 
 
 ¶10.  Delegates at the African Microfinance Conference in 
 Cape Town heard evidence that housing microfinance, i.e., 
 the provision of small loans to the poor as an alternative 
 to a conventional bank mortgage, was likely to increase in 
 South Africa.  Under the Financial Sector Charter, South 
 Africa's largest four commercial banks have agreed to 
 provide more mortgage products for financing low-income 
 housing.  The big four are on the verge of finalizing an 
 arrangement with government to manage the additional risk 
 of these loans.  With banks set to extend mortgage lending 
 downwards to low-income earners, and micro financiers 
 extending upwards through housing finance, the two groups 
 could yet clash in the middle of the previously under 
 serviced market. 
 
 ¶11.  Greater numbers of people moving to the cities have 
 fueled micro financiers, according to David Porteous, 
 conference presenter and former CEO of Finmark Trust, a 
 South African-based independent trust that seeks financial 
 solutions for the poor.  In South Africa, 58 percent of 
 people live in cities, and the numbers are growing. 
 Porteous said that while there was a need for more housing 
 microfinance in South Africa, there was an even greater 
 need in the rest of Africa.  Porteous said housing 
 microfinance differed from conventional microfinance 
 because housing loans were larger and repayable over a 
 longer term, thus putting more pressure on lenders' 
 balance sheets.  Because people with access to microloans 
 do not qualify for normal bank loans, the interest rates 
 are higher on microloans.  Source:  Business Day, August 
 ¶31. 
 
 STUDY ASSERTS MICROLENDERS' LOANS TOO SMALL TO BRING IN 
 PROFIT 
 --------------------------------------------- ---------- 
 
 ¶12.  A report on the study of 163 microfinance 
 institutions by the Washington-based Consultative Group to 
 Assist the Poor (CGAP) shows an emerging financial sector 
 battling to profit amid high expenses.  African 
 microfinance institutions show return on their assets of 
 1.6 percent, the lowest in the world.  By contrast, those 
 in South America report returns of up to 5 percent, while 
 those in Eastern Europe show returns of more than 7.6 
 percent.  The report says one of the main reasons for the 
 low returns is that African countries lend relatively 
 small amounts, $307 on average, that do not cover costs 
 that are generally higher than in many regions in the 
 world.  The research showed fewer Africans were likely to 
 default on repayments than elsewhere.  Only 4 percent of 
 African companies' loan portfolio was seen to be "at risk" 
 compared with 5.1 percent of South Asia's and 5.9 percent 
 of South America's.  Source:  Business Day, August 31. 
 
 BANKING STUDY HIGHLIGHTS HIGH COST TO POOR 
 ------------------------------------------ 
 
 ¶13.  In August 2004, a task group appointed by the 
 Treasury and the South African Reserve Bank released a 
 report, Competition in South African Banking, although the 
 study has not been available publicly.  Among its findings 
 is that the transfer of money, making a payment and the 
 cost of credit are all substantially higher for an 
 individual not having access to financial services. 
 
 ¶14.  The report investigated some of the reasons behind 
 the difficulty and expense of providing banking facilities 
 to low-income groups.  Out of a potential population for 
 banking services of 28 million, half were not receiving 
 services, according to FinMark Trust.  For an informal 
 micro-loan, which generally does not require ID, salary 
 slip or regular income, borrowers were charged between 222 
 percent and 360 percent (annualized) compared with prime 
 rate plus duties for a low-risk bank customer. 
 Approximately 9 percent of individuals in the lowest 
 income categories participate in stokvels (informal 
 voluntary savings plans) and 4 percent made use of 
 Postbank savings accounts.  Credit unions, common in other 
 countries, play no role in South Africa.  With regard to 
 insurance, individuals with low incomes were more likely 
 to be members of informal and commercial burial societies 
 than formal insurance plans.  An individual in the low- 
 income group was between four and five times more likely 
 to have a store card with rotating finance than a loan 
 through a bank.  The report cited the minimum capital 
 requirement of R250 million, the Banks Act provisions 
 limiting non-bank providers' access to wholesale funding, 
 high cost of adhering to regulations covering such issues 
 as money laundering and corporate governance, and the lack 
 of access to the banks' payment system as reasons for 
 difficulty in providing the poor with banking services. 
 The South African report noted that access for new 
 entrants to the payments system had not been transparent. 
 Source:  Business Report, August 30 and 31. 
 
 ¶15.  Comment.  On October 26, 2004, the major South 
 African commercial banks introduced Mzansi banking 
 accounts aimed at attracting South Africans not 
 participating in the formal banking sector.  Charges for 
 the Mzansi account range from 30 to 60 percent less than 
 charges on previous accounts available.  The banks 
 established these accounts after the banking competition 
 study was given to the Treasury for review.  End comment. 
 
 JULY TAX REVENUE COLLECTION STRONGER THAN PLANNED 
 --------------------------------------------- ---- 
 
 ¶16.  Four months into the 2005/6 fiscal year (South 
 Africa's fiscal year starts April 1), revenue collection 
 was higher than anticipated and may imply a deficit lower 
 than budgeted and an economy growing faster than what 
 official figures showed.  If revenue collection keeps at 
 this pace throughout FY2005/6, the budget deficit should 
 be lower and the South African government may be facing a 
 revenue surplus by March 2006.  Total revenue collected as 
 of the end of July amounted to R117.6 billion, 31.8 
 percent of the adjusted budgeted amount compared to 27.9 
 percent over the corresponding period in 2004.  Total 
 expenditure for the year ending in July amounted to R125.8 
 billion, yielding an accumulated deficit of R8.2 billion. 
 The 2005/06 Budget Review (released in February 2005 and 
 provides planned expenditures and revenues for three 
 fiscal years) estimated total revenue for FY2005 of R369.9 
 billion and total expenditure at R 417.8 billion.  With a 
 forecasted GDP growth of 4.3 percent and CPIX (consumer 
 prices minus mortgage costs) inflation of 4 percent, the 
 Budget Review forecasted the deficit to be 3.1 percent of 
 GDP for the fiscal year.  Source:  Standard Bank, 
 Government Finance Alert, August 31, National Treasury, 
 Statement of the National Revenue, Expenditure and 
 Borrowing at 31 July 2005, August 30. 
 
 TEITELBAUM