Identifier
Created
Classification
Origin
06PRETORIA1709
2006-04-26 14:09:00
UNCLASSIFIED
Embassy Pretoria
Cable title:  

SOUTH AFRICA ECONOMIC NEWSLETTER APRIL 28 2006

Tags:  ECON EINV EFIN ETRD BEXP KTDB PGOV SF 
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RUCPCIM/CIMS NTDB WASHDC
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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

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.

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