SOUTH AFRICA ECONOMIC NEWSLETTER APRIL 28 2006

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