SOUTH AFRICA ECONOMIC NEWSLETTER

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