VZCZCXRO5348
RR RUEHDU RUEHJO RUEHMR
DE RUEHSA #1709/01 1161409
ZNR UUUUU ZZH
R 261409Z APR 06
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3060
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 001709 
 
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 28 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: 
 
 -  March Inflation Slows; 
 -  Producer Prices Slow Though Above Expectations; 
 -  Small and Medium Firms Important Job Creators; 
 -  Study Points to Benefits of Providing ARV Treatment; 
 -  Survey Shows HIV/AIDS a Growing Problem for Microfinance; 
 -  Bank Fee Report Highlights Revenue Earned by Payment System; 
 and 
 -  SARB Report Highlights Possible Future of National Payment 
 System. 
 End Summary. 
 
 March Inflation Slows 
 --------------------- 
 
 ¶2.  South Africa's targeted CPIX (consumer prices minus 
 mortgage costs) annual inflation rate slowed sharply in 
 March, fueling expectations that interest rates will 
 remain unchanged in 2006 despite increasing global oil 
 prices.  CPIX increased by 3.8%, from February's 4.5% 
 growth, the lowest annual increase since November 2005.  A 
 Reuters poll predicted that the CPIX would rise by 3.9%. 
 CPIX inflation has been inside the South African Reserve 
 Bank's 3-6% target range for 31 consecutive months. 
 Higher prices for food, fuel and medical care were the 
 main factors behind inflation in March, with food the 
 biggest contributor to price increases.  However, this 
 upward pressure was countered by reduction in prices of 
 clothing and footwear, furniture and communications. 
 Overall consumer prices increased 3.4% compared to 
 February's 3.9% growth.  Core inflation (without fuel and 
 food) increased 2.9%, compared to February's 4.1%, showing 
 that second round price impacts of higher oil prices are 
 muted.  Source:  Reuters and Standard Bank's CPI Alert, 
 April 25. 
 
 Producer Prices Slow Though Above Expectations 
 --------------------------------------------- - 
 
 ¶3.  South Africa's producer price index (PPI) slowed in 
 March, although increased by more than market 
 expectations.  Overall PPI grew 5.4% in March, compared to 
 5.5% in February.  A Reuters poll of economists expected 
 producer prices to increase 5.2% in March.  Domestically 
 produced prices increased 5% and imported producer prices 
 increased 6.7%, compared to February's growth of 5.1% and 
 6.9%, respectively.  Inflation in the mining, agriculture, 
 petroleum and food sectors accounted for most of March's 
 total 5.4% inflation.  Inflation in mining and quarrying 
 products, chemicals, basic metals account for most of the 
 total inflation in imported producer prices during March. 
 Source:  Reuters and Statistics SA Release P0142.1, April 
 ¶26. 
 
 Small and Medium Firms Important Job Creators 
 --------------------------------------------- 
 
 ¶4.  According to the third South African Employment 
 Report, South Africa created 357,000 jobs in 2005, with 
 90% of these jobs coming from small and medium-sized 
 companies.  T-Sec economist Mike Schussler, who compiled 
 the report, said formal employment grew 4.5% in 2005. 
 This differs from the findings of Statistics SA's Labor 
 Force Survey (LFS), published in September 2005, which 
 estimated that 158,000 formal non-farming jobs would be 
 created in 2005.  The Company and Intellectual Property 
 Registration Office's data showed that over 206,000 firms 
 were created in 2005, but not all new firms were actively 
 employing people.  While employment grew 4% in medium- 
 sized companies and 2% in large firms, small firms created 
 the majority of new jobs, in sectors such as construction, 
 retail and general services.  Schussler noted the 
 difficulties of achieving the government's target of 
 halving unemployment by 2014.  According to him, the South 
 African economy needed to grow 6.5% a year in order to 
 halve the official unemployment rate of 26.7% by 2014.  To 
 halve the broader unemployment rate (38.8%), which 
 includes discouraged workers, South Africa's GDP's growth 
 would need to reach 9.3% per year, creating 60,000 jobs 
 
PRETORIA 00001709  002 OF 003 
 
 
 per month.  Schussler estimated that if the economy grew 
 at 4% a year, unemployment may be halved by 2023.  The 
 South African Employment Report included employment 
 surveys from 10 emerging markets.  These emerging 
 countries had an average of 55% of its working age 
 population employed, while South Africa employed 39% of 
 its working age population.  Source:  Business Day and 
 Business Report, April 26. 
 
 Study Points to Benefits of Providing ARV Treatment 
 --------------------------------------------- ------ 
 
 ¶5.  A recent study from the Bureau for Economic Research 
 (BER) at the University of Stellenbosch found that the 
 macroeconomic impacts of HIV/AIDS in South Africa would 
 amount to a 0.44% annual loss in GDP between 2005 and 
 ¶2010.  The study entitled, "The Macroeconomic Impact of 
 HIV/AIDS under Alternative Intervention Scenarios (With 
 Specific Reference to Antiretroviral Treatment) on the 
 South African Economy," also found that providing 
 antiretroviral treatment would mitigate the estimated GDP 
 loss of 0.44% to 0.4%.  The BER study described three 
 model-based scenarios: no AIDS; AIDS with prevention 
 programs but no antiretroviral treatment program; and AIDS 
 with prevention programs and a large-scale antiretroviral 
 treatment program with a take-up rate of 50%.  The results 
 from the different scenarios indicated the epidemic would 
 have a negative impact on overall economic growth and, in 
 the absence of antiretroviral treatment, the rate of GDP 
 growth could fall from a projected average of 4.4% over 
 2002 to 2015 to 4% a year due to the epidemic.  Providing 
 antiretroviral treatment could reduce the impact of 
 HIV/AIDS on economic growth by on average 17% between 2000 
 and 2020.  Per capita GDP was projected to be about 8% 
 higher in real terms by 2020 because the reduction in 
 population would be larger than the negative impact on 
 GDP.  Certain sectors of the economy would experience 
 higher negative impacts from HIV/AIDS.  The general 
 government, water and electricity, mining, metals and 
 machinery, and electrical machinery sectors were more 
 exposed to the supply-side risk and demand-side risks. 
 The supply-side risk was due to high HIV prevalence and 
 relatively high skills intensity, while the demand-side 
 risk stemmed from the impact of HIV/AIDS on intermediate 
 and final demand and exports.  Sectors with low overall 
 risk included community, social and personal services, 
 clothing and textiles, agriculture and construction. 
 Source:  Business Report, April 24. 
 
 Survey Shows HIV/AIDS a Growing Problem for Microfinance 
 --------------------------------------------- ----------- 
 
 ¶6.  According to a study by Africap Micro Ventures, more 
 than 50% of microfinance institutions across Africa viewed 
 HIV/AIDS as a growing problem due to rising default rates. 
 The study focused on 10 types of microfinance institutions 
 including non-governmental organizations, commercial 
 banks, and licensed and unlicensed financial institutions. 
 Results showed that, as a rule, repayment rates were high 
 at 98%, although one bank reported a 50% default rate. 
 Only a third of the companies in the survey had adjusted 
 products to client needs, making changes such as 
 flexibility in loan repayments and adjusting loan amounts. 
 At an Africap conference in Cape Town, an HIV/AIDS Risk 
 Management Task Force Working Group, composed of more than 
 20 organizations, is trying to finalize an HIV/AIDS code 
 of conduct for microfinance institutions.  Source: 
 Business Report, April 25. 
 
 Report Highlights Bank Revenue Earned from Payment System 
 --------------------------------------------- ------------ 
 
 ¶7.  "The National Payment System and Competition in the 
 Banking System," a report commissioned by the Competition 
 Commission, showed that South African banks earned R29 
 billion ($4.8 billion, using 6 rands per dollar) from the 
 national payment system, with R10 billion ($1.7 billion) 
 profit.  The banks earned 38% of total income from the 
 fees earned by the national payment system.  The national 
 payment system facilitates the transfer of money between 
 customers, merchants and banks.  Penelope Hawkins, one of 
 the report's authors, asserted that there was little 
 apparent link between the costs associated with a 
 transaction and the income banks received from 
 
PRETORIA 00001709  003 OF 003 
 
 
 transactions fees.  Hawkins said the board of Bankserv, a 
 payment switching arrangement owned by the large banks, 
 should also be broadened to include the interests of 
 smaller banks and nonbanking financial institutions.  The 
 fees charged by South Africa's banks are considered among 
 the world's highest and serve as a competitive barrier for 
 more entrants in the formal banking system.  The Banking 
 Association's Brad Gillis said the R29 billion the report 
 mentioned appeared too high and probably included retail 
 and corporate revenues.  The Competition Commission 
 announced that a public inquiry would be held within the 
 next two months.  Source:  Business Day, April 21. 
 
 SARB Report Highlights National Payment System 
 --------------------------------------------- - 
 
 ¶8.  The South African Reserve Bank's (SARB) Vision for 
 2010 focuses on how the formal banking sector can widen 
 its access to serve the large segment of South Africa's 
 unbanked population as well as maintain the stability of 
 the national payments system.  In order to make banking 
 more affordable to lower income individuals, reduced 
 banking charges via increased competition are necessary. 
 Increasing competition by introducing non bank firms 
 offering financial services may be one option.  Examples 
 of such firms include cellular companies with 
 communication networks, insurers, and microlenders, which 
 are already providing some form of financial services.  To 
 increase competitors, barriers to entry have to be 
 reduced, among them the obstacles to participating in the 
 National Payment System, through which all banking 
 transactions in the economy are ultimately settled.  At 
 the same time, the SARB must maintain its security and 
 stability.  If a payments system is not protected against 
 risk, it could lead to a banking collapse.  The SARB 
 report describes different paths to help non-banks become 
 clearing and settlement banks.  The Dedicated Banks Bill, 
 published at the end of 2004, allows for second- and third- 
 tier banks, which undertake certain types of banking 
 business only, to function within the payment system. 
 Investec Asset Management portfolio manager Chris Steward 
 predicts more collaboration between banks and other non 
 bank institutions, such as the joint cellular banking 
 project between MTN and Standard Bank, viewing that more 
 entrants in the banking sector are less likely given the 
 regulatory system and infrastructure required.  He also 
 disagreed with the perception that banking was a monopoly, 
 citing recent below-inflation increases in bank charges. 
 Source:  Business Report, April 24. 
 
 TEITELBAUM