VZCZCXRO0502
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #1649/01 1111038
ZNR UUUUU ZZH
R 211038Z APR 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 2985
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 PRETORIA 001649 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR OAISA/RALYEA/CUSHMAN 
USTR FOR COLEMAN 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER APRIL 21 2006 
 ISSUE 
 
 ¶1. Summary.  Each week, Embassy 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: 
 
 -  SA Telecommunication Costs High; 
 -  Chinese Cars Will Be Available in SA; 
 -  Bank Fee Report Due; 
 -  Mboweni Worried About High Consumer Spending; 
 -  Microlenders Report Released; 
 -  OECD Report Views Improving Rural Infrastructure More 
 Important than Land Reform; 
 -  Environmental Taxes Proposed; and 
 -  Housing Market Cools. 
 End Summary. 
 
 SA Telecommunication Costs High 
 ------------------------------- 
 
 ¶2.  Based on an annual survey conducted by NUS Consulting, 
 South Africa's telecommunication costs are still quite 
 high.  Among 14 countries surveyed, South African costs 
 for national long distance calls and cell phones are the 
 highest.  According to the survey, a three-minute national 
 call (a call made over a distance of 320 kilometers) using 
 a fixed-line phone costs $0.34 in South Africa while a 
 similar call costs $0.08 in Sweden, the lowest call rate 
 among the 14 countries surveyed.  Similarly, a three 
 minute national call on a cell phone costs $0.74 in South 
 Africa while a similar call costs $0.16 in the U.S.  South 
 African fixed-line charges for local and international 
 calls were the second-highest after those charged by 
 operators in Belgium and the U.S., respectively.  Even 
 though Telkom had reduced its charges for national and 
 international costs in 2005, the decreases do not match up 
 to the widespread price reductions made by 
 telecommunications operators in many other countries. 
 According to NUS, Telkom's high telephone and internet 
 prices could allow the second national operator to acquire 
 some of Telkom's market share.  In 2005, Telkom estimated 
 that it could lose between 10% and 15% of its market share 
 to the second national operator, expected to start in 
 June.  The United States, which has the lowest cell phone 
 prices among the countries surveyed, is the most expensive 
 country for international fixed-line prices.  A three- 
 minute international call from New York to London costs 
 $0.78 while a similar call from London to New York costs 
 $0.13.  Also included in the survey were Spain, Germany, 
 Canada, France, Denmark, Italy, The Netherlands, Australia 
 and Finland.  Source:  Business Day, April 18. 
 
 Chinese Cars Will Be Available in SA 
 ------------------------------------ 
 
 ¶3.  Bidvest, a McCarthy Motor Holdings subsidiary, 
 confirmed that it was trying to close a deal with motor 
 vehicle suppliers in China to provide trucks, sports 
 utility vehicles and minibuses from China starting the 
 first quarter 2007.  McCarthy would fund part of the cost 
 of converting left-hand-drive facilities in China to right- 
 hand-drive production.  McCarthy will then have the rights 
 to distribute the vehicles in South Africa and other right- 
 hand-drive markets.  McCarthy expects that the Chinese 
 cars would compete with Tata, a low priced Indian car 
 introduced in South Africa in 2004.  Chinese-made vehicles 
 would be subjected to costs such as a right-hand-drive 
 premium, 32% import duty and high shipping costs of as 
 much as R12000 a vehicle.  China is expected to become a 
 major vehicle exporter in the next few years and could 
 pose a threat to the South African automotive industry, 
 which contributes about 7.4% to GDP.  Due to China's lower 
 engineering and manufacturing input costs, it was able to 
 make vehicles 40% more cheaply than both Japanese and 
 Korean car makers.  Source:  Business Day, April 19. 
 
 Bank Fee Report Due 
 ------------------- 
 
 ¶4.  The Competition Commission will release a study of 
 bank charges of South Africa's top four banks to see if 
 consumers are paying too much for transaction and monthly 
 fees.  In June 2005, the Competition Commission asked for 
 this study after a prior April 2004 study stated that the 
 
PRETORIA 00001649  002 OF 003 
 
 
 top four banks stifled competition and led to high banking 
 charges to the detriment of the poor and low income 
 workers.  The Commission can refer matters to the 
 Competition Tribunal for prosecution.  The Tribunal holds 
 hearings and may fine companies 10% of revenue if they are 
 found guilty of price collusion.  The 2004 report asserted 
 that South African banks charge fees on more transactions 
 and have higher fees than banks in other countries.  In 
 addition, the 2004 report focused on the national payment 
 system (the set of interbank transfer procedures 
 circulating money) as a way of restricting bank 
 competition.  The upcoming report should focus on ways to 
 ensure that smaller banks have equitable access to the 
 payment system.  South Africa's largest banks have higher 
 returns on equity than most banks in Europe.  Standard 
 Bank, Africa's largest bank, had a return on equity of 
 25.2% in 2005, while ABSA, controlled by Barclays, had a 
 return on equity of 27%.  FirstRand, which controls the 
 No. 2 banking group by assets in South Africa, had a 
 return on equity of 30% in the six months through December 
 31 2005.  These compare with an average of 16.2% among the 
 76 members of the Bloomberg Europe Banks and Financial 
 Services Index.  Source:  Bloomberg, Business Report April 
 19; Business Report, April 20. 
 
 Mboweni Worried About High Consumer Spending 
 -------------------------------------------- 
 
 ¶5.  South African Reserve Bank (SARB) Governor Tito 
 Mboweni warned of significant inflationary risks caused by 
 strong credit extension and consumer demand along with 
 rising international oil prices and a widening current 
 account deficit.  Strong consumer spending and economic 
 growth tend to increase prices along with imports, putting 
 pressure on the current account balance.  Household debt 
 levels have increased and savings declined, leading 
 Mboweni to voice concern about the sustainability of 
 consumer demand if interest rates rise.  He viewed 
 interest rate increases as more likely than reductions. 
 However, he noted that the overall inflation picture 
 remains comfortably within the SARB targets, providing 
 support for the views of some economists that interest 
 rates will remain unchanged in 2006.  Mboweni said the 
 SARB's models forecast the targeted CPIX (consumer 
 inflation less mortgage costs) rate peaking just below 5% 
 in the first quarter of 2007, then subsiding to 4.6%, and 
 remaining at that level until the end of 2008.  Source: 
 Business Times and IOL, April 19. 
 
 Microlenders Report Released 
 ---------------------------- 
 
 ¶6.  A study by the Micro Finance Regulatory Council (MFRC) 
 on township based microlenders reports that there are 
 30,000 township microlenders serving 600,000 customers. 
 However, there are only 300 microlenders registered with 
 the MFRC.  The survey shows that relationships with 
 clients by these lenders are of a far more personal 
 nature, with the majority of those surveyed having between 
 21 and 40 clients with an average loan size of between 
 R500 and R1 000.  These relationships tend to be long- 
 standing, with new clients generally taken on via 
 references and rather limited credit checks.  The average 
 loan - from registered and unregistered lenders - is 
 around R750 ($125, using 6 rands per dollar).  The period 
 of the loans is also generally shorter than those of 
 banks.  The registered microlenders tend to have longer 
 periods, while unregistered operators are more willing to 
 lend higher amounts for between one and six months.  The 
 MFRC research shows that interest rates varied between 25% 
 and 30% a month, which equates to between 300% and 360% a 
 year.  The MFRC study is the most recent and comprehensive 
 into previously disadvantaged lenders to the township, 
 informal settlement, and rural community markets.  Source: 
 Eastern Province Herald and Sunday Times April 18. 
 
 OECD Report Views Improving Rural Infrastructure More 
 Important than Land Reform 
 --------------------------------------------- -------- 
 
 ¶7.  According to an Organization for Economic Cooperation 
 and Development report on South African agricultural 
 policies, land redistribution is not enough to alleviate 
 South African poverty.  The OECD asserted that given its 
 
PRETORIA 00001649  003 OF 003 
 
 
 limited resources of water and arable land, South Africa 
 should focus more on improving social services and 
 infrastructure in impoverished rural areas.  The report 
 stated that lack of official skills and support for new 
 farmers had hampered transformation in agriculture and 
 resulted in a number of black farmers failing.  It also 
 pinpointed a lack of funding.  The report is the first 
 OECD report on the agricultural sector in South Africa. 
 The South African government's target is 30% of farm land 
 owned by blacks by 2014.  So far, government has reached 
 just under 4% of its target.  Source:  Reuters and 
 Business Day, April 20. 
 
 Environmental Taxes Proposed 
 ---------------------------- 
 
 ¶8.  A discussion paper released by the National Treasury 
 outlined options to reform South African taxes to include 
 environmental charges aimed at reducing pollution. 
 Historically, environmental taxes have been used to raise 
 revenue without any concern for the environment.  Examples 
 include the Road Accident Fund levy, the customs and 
 excise levy, the plastic shopping bags levy and the local 
 government electricity surplus levy.  In South Africa, 
 environmental taxes account for 2% of GDP and 
 approximately 10% of total tax revenue.  Four options for 
 reforming South Africa's environmental tax laws are 
 considered in the discussion paper.  The first option is 
 to reform current environmental taxes.  This would include 
 reviewing the transport and solid waste sectors and may 
 include encouraging the use of cleaner transport fuels 
 with leaded petrol being taxed at a higher rate than 
 unleaded to discourage its use.  The second option is to 
 introduce entirely new environmentally related taxes such 
 as an electricity consumption tax, a fossil fuel input 
 tax, taxes on water use and on effluents.  The third 
 option is to provide incentives for environmentally 
 friendly activities.  These would include extending 
 incentives to farmers for the eradication of noxious 
 plants and the prevention of soil erosion as well as wider 
 environmental and conservation-based land-use practices. 
 The last option is to introduce tax incentives.  Five 
 broad tax incentives have been considered: the creation of 
 environmental funds; partial marking of environmentally 
 related taxes; the introduction of rehabilitation funds; 
 accelerated depreciation allowances and a review of 
 specific tax provisions.  Source:  Business Day, April 20. 
 
 Housing Market Cools 
 -------------------- 
 
 ¶9.  The latest quarterly First National Bank (FNB) 
 residential barometer shows signs of a cooling, though 
 buoyant housing market.  In the major metropolitan areas, 
 60% of residential property sellers did not receive asking 
 price in the first quarter of this year compared with just 
 29% during the first quarter in 2005, despite increasing 
 confidence in the property market.  Ed Grondel, the chief 
 executive of FNB HomeLoans, said unrealistic price 
 expectations by sellers and more buyer choice were the 
 main reasons why sellers failed to obtain their asking 
 price.  Overall activity level in the housing market had 
 increased 6.3% from 5.8% growth in the fourth quarter of 
 ¶2005.  Properties remained on the market for an average of 
 eight weeks, compared with seven in the fourth quarter of 
 ¶2005.  FNB's residential property barometer is a forward- 
 looking indicator of the residential property market based 
 on quarterly perceptions of 150 real estate agents. 
 Source:  Business Report and Business Day, April 20. 
 
TEITELBAUM