SOUTH AFRICA ECONOMIC NEWSLETTER APRIL 21 2006

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

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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

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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.

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