SOUTH AFRICA ECONOMIC NEWSLETTER

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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