SOUTH AFRICA ECONOMIC NEWSLETTER

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TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
May 13 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:
- Barclays Deal Only Waits for Shareholder Approval;
- Reserve Bank to Manage Rand Impact;
- Barclays-ABSA Deal Could Halve Current Account;
- Exchange Reserves Shows Small Change;
- South Africa's Governance High in Some Areas; Less
Stable in Others;
- Tourism Charter Announced; and
- South Africa Improves its Competitiveness Ranking.
End Summary.

BARCLAYS DEAL ONLY WAITS FOR SHAREHOLDER APPROVAL
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2. Britain's Barclays Bank made a final offer of $5.5
billion for control of South African bank ABSA, marking
its return to South African retail banking and the biggest
foreign direct investment in the country. The deal only
awaits shareholder approval expected on June 13. The UK
bank's long-awaited announcement is a major vote of
confidence in the South African economy more than a decade
after the demise of the apartheid regime and 19 years
after Barclays' forced exit from the country. Britain's
third-biggest bank will pay R33 billion in cash for 60
percent of ABSA, South Africa's biggest retail lender.
After eight months of talks, Barclays is offering R82.5 a
share and ABSA will pay its shareholders a dividend of R2
a share. Finance Minister Manuel's approval of the deal
confirms that Barclays has agreed to meet the government's
conditions to the acquisition. The conditions, outlined
in the National Treasury's statement, are that ABSA remain
a locally listed company with its primary listing on the
JSE Securities Exchange, and that Barclays maintain ABSA's
board make-up in the sense that ABSA's chief executive and
the majority of the executive management remain South
African citizens. Barclays has agreed to meet or exceed
all the black economic empowerment targets in the
financial sector charter, and the South African Reserve
Bank will remain the lead regulatory authority for ABSA.
The approval represents a shift in the government's "four-
pillar" policy. Manuel said last year that the country
maintained a "four-pillar" policy of having a minimum of
four big, locally owned banks to ensure effective
competition. However, a National Treasury statement
issued on May 8 said approval of the Barclays deal was
consistent with the policy. The four-pillar policy
remains in place, with the only difference being that
ABSA, as one of the four pillars, will now have a foreign
majority shareholder. Negotiations between the two banks,
first made public in September, intensified over the past
four weeks. Malcolm Hewitt, the managing director of
Barclays sub-Saharan Africa and Indian Ocean, said that
Barclays operated in 12 African countries. If the ABSA
deal went through, it would have a presence in 13 or 14
countries. Barclays initially bid R79 a share and
increased its price to win over minority shareholders.
After the transaction is sealed, Barclays will make about
a third of its profits outside the UK, up from about 20
percent now. The purchase is Barclays' biggest step so
far in a plan to double its share of profit from outside
Britain to diversify risk and expand in higher-growth
markets. Source: Business Report, SAPA, Business Day,
Reuters, May 9.

RESERVE BANK TO MANAGE RAND IMPACT
--------------


3. South Africa will seek to ensure that the R33 billion
purchase of ABSA Group, the nation's biggest consumer
lender, by Barclays would not have a "negative impact" on
the rand, Treasury Director-General Lesetja Kganyago said
yesterday. Kganyago said the Reserve Bank "will in the
normal course of its business deal with the management of
the inflows." Finance Minister Trevor Manuel told
reporters, "what you and I don't know is how much of this
transaction has been discounted" in the value of the rand.
As Finance Minister he "couldn't take a view on the
currency." Source: Business Report, May 9.

BARCLAYS-ABSA DEAL COULD HALVE CURRENT ACCOUNT DEFICIT
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4. According to ABSA economist Christo Luus, Barclays'
proposed acquisition of 60 percent of ABSA could finance
half of South Africa's current account deficit for the
year. British bank Barclays has offered about R33bn for a
stake in ABSA, while South Africa's current account
deficit for 2005 is forecasted at R68 billion. The
anticipated 2005 deficit would be about 4.7 percent of
gross domestic product (GDP),which is historically high,
Luus said. Between 1994 and 2004, foreign direct
investment (FDI) into the country averaged about R10.7
billion a year, or 1.2 percent of annual GDP. Net FDI was
even lower at 0.7 percent of GDP per annum. Between 1999
and 2004, total FDI was R121 billion. The rand could
remain stronger which would contribute towards the
inflation target continuing to be met and lessen the need
for much higher interest rates. However, about R1 billion
in dividend payments would accrue each year to foreign
shareholders, negatively affecting the current account.
However by improving domestic business opportunities,
investment and growth, the deal may reduce the desire of
both resident and foreign shareholders to repatriate
dividend income. South Africa's low ratios of gross
domestic saving and gross fixed capital formation as a
percentage of GDP (14.9 percent and 15.8 percent,
respectively) could therefore be boosted by between one
and two percentage points. Source: SAPA, May 9.

EXCHANGE RESERVES SHOWS SMALL CHANGE
--------------


5. The South African Reserve Bank (SARB) continued its
conservative purchasing of foreign reserves in April,
increasing by $156 million. Total reserves now amount to
$14.3 billion. Analysts were keeping an eye on the
figures to see if sterilization of the inflow of foreign
exchange from the Barclays-ABSA deal had already begun,
but the relatively small increase in foreign exchange
reserves suggests that it has not. When Finance Minister
Trevor Manuel announced on Sunday that the deal had
received regulatory approval, SARB Deputy Governor Xolile
Guma said the dollar proceeds would be absorbed into
official reserves to minimize disruption to local
financial markets. Economists now expect this month's
figures to show a large rise in foreign exchange reserves,
reflecting the Bank's purchase of dollars flowing in from
the deal, which would otherwise cause an unwelcome
strengthening of the rand. The latest figures suggest
that, even though the Bank had indicated its preference
for a more competitive rand and expressed concern about
the effect of its strength on certain economic sectors, it
was not seeking to influence the rand's value through more
aggressive reserves buying. Source: Reuters and Business
Day, May 10.

SOUTH AFRICA'S GOVERNANCE HIGH IN SOME AREAS; LESS STABLE
IN OTHERS
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6. The World Bank issued its latest "Governance Matters"
report comparing governance indicators among 209
countries. Six components of good governance are
highlighted: (1) voice and accountability, measuring
political, civil and human rights; (2) political
instability and violence, measuring the likelihood of
violent threats to, or changes in, government, including
terrorism; (3) government effectiveness, measuring the
competence of the bureaucracy and the quality of public
service delivery; (4) regulatory burden, measuring the
incidence of market-unfriendly policies; (5) rule of law,
measuring the quality of contract enforcement, the police,
and the courts, including judiciary independence, and the
incidence of crime; and (6) control of corruption,
measuring the abuse of public power for private gain,
including petty and grand corruption. According to the
report, South Africa is slightly less politically stable
than most other countries. However, in other areas of
governance South Africa remains well above the world
average with a significant improvement in the category of
government effectiveness over the past seven years. The
report places countries in categories which reflect their
variation above or below the world average. South
Africa's political stability is placed at -0.24, below the
world average of 0, the same as Argentina. At one end of
the scale, Iraq is at -2.87 in terms of political
stability, Zimbabwe at -1.86. The U.S. is at 0.47, and at
the opposite end of the spectrum, the Caribbean island of
St Kitts and Ben Nevis is at 1.41. While the bank said
that some of its more than 350 data sources on more than
209 countries were based on perceptions, they constituted
important sources of information. In its assessment of
political stability, South Africa has moved considerably
closer to the world average since 1996, largely due to a
drop in political violence. The categories where South
Africa scored towards the top of the first two quartiles
above average include: voice and accountability;
government effectiveness; the regulatory burden on
business; the rule of law; and control over corruption.
However from 1996 to last year, it slipped slightly in the
areas of the rule of law and control of corruption.
Source: Business Day, May 10.

TOURISM CHARTER ANNOUNCED
--------------


7. Environment and Tourism Minister Marthinus van
Schalkwyk announced a black economic empowerment (BEE)
charter for tourism that would encourage increased BEE
ownership. A survey done in 2003 showed there was an
average of only six percent BEE ownership in the tourism
industry. The charter has seven broad indicators
including ownership, strategic management, employment
equity, skills development, preferential procurement,
enterprise development and social development. It also
contains measurement tools to help participants in the
industry identify their current BEE levels and how to
improve their ratings. The charter will apply to every
single enterprise in the tourism value-chain. All
businesses with an annual revenue of less than R5 million
($820,000, using 6.1 rands per dollar) will be exempt from
the ownership requirements, although the six other
empowerment targets will still apply. Being rated would
not be compulsory but there would be incentives to
implementing the BEE targets. Ratings would be used by
government in determining spending partners and for
investment and development funding allocations. The
charter would be implemented over two periods -- the first
for the five years to 2009 and the second during the
period to 2014. The BEE ownership target for 2014 was 30
percent. Van Schalkwyk said a BEE Council would be
established and the transformation charter would be filed
by August 1. Source: SAPA and Business Report, May 9.

SOUTH AFRICA IMPROVES ITS COMPETITIVENESS RANKING
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8. The World Competitiveness Yearbook, compiled by Swiss
business school the Institute for Management Development,
ranks the 60 most influential world economies. The 2005
Yearbook ranked South Africa at 46th position, reversing a
trend that saw its rating decline from a peak of 37th in
2001 to 49th in 2004. The report warned that South
Africa's high unemployment and HIV/AIDS rate remained the
biggest obstacles to improving its ranking, emphasizing
the need for greater urgency in government's efforts to
encourage labor force participation. Although South
Africa was rated last of the 60 countries when it came to
unemployment, it rated second when it came to job growth.
Since only 25 percent of the population was working, this
job creation came off a low base. By contrast, 58 percent
of Germany's and 46 percent of the UK's populations were
employed. The list was headed by the U.S., Hong Kong and
Singapore, while China dropped seven places to 31st, due
to a negative opinion survey conducted in the business
community. South Africa's best performance was in the
area of government efficiency, where it was ranked at
32nd, higher than countries such as Germany, India, Japan,
Belgium and France. Its poor infrastructure ranking
lowered the overall score where South Africa ranked 58th,
down from 56th last year, above only Mexico and Indonesia.
Source: Business Day, May 12.

FRAZER