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Cablegate: South Africa Economic Newsletter

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 PRETORIA 004784

SIPDIS

DEPT FOR AF/S/JDIFFILY; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR OAISA/BARBER/WALKER/JEWELL
USTR FOR COLEMAN
LONDON FOR GURNEY; PARIS FOR NEARY

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER
OCTOBER 29, 2004 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:
- New Bank Account Aimed at Poor;
- Mid Term Expenditure Framework Submitted to Parliament;
- Consumer Inflation Subdued;
- European Firm Survey Optimistic on SA Economy;
- Producer Prices Remain Low
End Summary.

New Bank Account Aimed at Poor
------------------------------


2. South African banks introduced a new national banking
account, Mzansi, aimed at attracting the over 13 million
South Africans not participating in the formal financial
sector. The government's goal of banking the 'unbanked'
population drove this low-cost account via the Black
Economic Empowerment (BEE) financial services charter.
Government hopes to reach this goal by encouraging banks
to lower their historically high bank charges and increase
the number of ATMs and branches in lower-income areas.
Charges for the Mzansi account vary between banks and
range from 30 percent to 60 percent less than charges on
previous account offerings. Typical bank charges for
Mzanzi accounts include ATM cash withdrawals and cash
deposits, with each bank charging different amounts. The
bank charges for ATM cash withdrawals range between R3.25
($0.52, using 6.2 rands per dollar) and R5 ($.81). Bank
charges for cash deposits range from R4 ($0.65) to R10.75
($1.73). Other types of charges also vary by bank. FNB
charges the lowest rates for using the Mzansi card as a
debit card to pay for goods, while ABSA bank charges no
fee to open a new account, has no minimum balance
requirements, and does not charge for failed transactions
when funds are inadequate. A deposit of R20 ($3.23) is
required to open an account, and some banks require a
minimum account balance as well. South African banks
pooled their infrastructure costs of establishing Mzansi
accounts, which means that 12,000 ATMs are available to
every Mzansi account holder. So far, the big four South
African banks and Postbank, the post office's savings
institution, are the only one offering the Mzansi account.
Source: Business Day and Business Report, October 26.

MID TERM EXPENDITURE FRAMEWORK SUBMITTED TO PARLIAMENT
--------------------------------------------- ---------

3. Every October, the Finance Minister presents the
Medium Term Budget Policy Statement (MTBPS), which
highlights the South African budget framework for the next
three years. MTBPS updates economic growth and revenue
and expenditure forecasts and suggests potential policy
changes that would support the government's key
priorities. Key highlights of Finance Minister Trevor
Manuel's speech included: (1) relaxation of foreign
exchange controls on South African corporations; (2) an
additional R50 billion ($8 billion) aimed at poverty
alleviation, infrastructure improvements and increased
wages of teachers and police; (3) no substantial tax
changes; and (4) increased budget deficit in 2005/6,
rising to 3.5 percent of GDP compared to 3.2 percent in
2004/05. GDP forecasted growth for the next two years
were revised, reaching 3.9 and 3.7 percent 2005 and 2006,
compared to February 2004's forecasts of 3.6 and 4 percent
respectively. Fiscal policy continues to remain slightly
expansionary in the short term. In FY 2005, the deficit
as a percentage of GDP should reach 3.2 percent and then
gradually decline to 2.5 percent by FY2007, as revenues
should increase by 10 percent and expenditures by 9
percent over the two-year period. High growth in social
services spending puts increasing pressure on government
expenditures. Welfare and social security spending
(including child support, disability and elderly grants)
constitute the fastest growing share of overall
expenditures, increasing from 18.6 percent of total
government expenditures in FY 2004 to 20 percent by 2007.
Health spending shares will remain relatively constant at
12.5 percent in FY2004 and reaching 12.6 percent by 2007.
Little change in tax policy was announced. Gross tax
revenue for 2004/05 is expected to be R1.9 billion higher
than the February 2004. Corporate taxes are expected be
R6.2 billion less than budgeted, higher value added and
personal tax revenues offset weaker corporate tax
collections. The inflation rate, consumer prices
excluding mortgages (CPIX) remains well within the
targeted 3-6 percent range at 5 percent over the next
three years. Source: Business Day and Business Report,
October 27; Standard Bank's MTEF Alert, October 26.

4. Comment. The most unexpected announcement was the
relaxation of exchange rate controls for corporations.
The present rules limits offshore investments to R2
billion per project for investments in Africa and R1
billion elsewhere, in addition to 20 percent of the excess
cost. Now, the limits on outward investments by local
corporations and restrictions on the repatriation for
foreign dividends are removed as well as restrictions on
individuals to invest in foreign firms listed on the South
African exchanges. Even though there are no restrictions
on corporations' foreign direct investment, corporations
will still be required to apply to the Reserve Bank for
approval. Limits on pension funds, insurance companies,
mutual funds (unit trusts) and individuals are still in
place but expectations are that they will be removed soon.
More relaxed exchange controls for corporations should
help the government's goal of investment reaching 25
percent of GDP by 2014. End Comment.

CONSUMER INFLATION SUBDUED
--------------------------

5. In September, consumer prices increased 1.3 percent
(y/y) slightly higher than August's y/y increase of 1
percent, and consumer prices excluding mortgages (CPIX)
increased 3.7 percent well within the market expectations
of 3.9 percent. Increases in transport and food explained
much of September's increase in prices while declines in
housing and medical care and expenses offset the sharp
increase in transport expenses. Administered prices
(price set by either government or official regulatory
body rather than the market) continued to show strong
growth, increasing by 7.4 percent in September. Food
inflation increased of 1.6 percent annually compared to
1.4 percent in August. So far, rain in South Africa has
not been sufficient to plant, although increased imports
can increase domestic food supplies. Rising food costs
and oil prices are potential future risks, although the
current rand strength will mitigate the impact of
increased inflation coming from imports. Source:
Standard Bank CPI Alert, October 27; Statistics SA Release
P 0141.1 and Discussion Document, Administered Prices
September 2004.

EUROPEAN FIRM SURVEY OPTIMISTIC ON SA ECONOMY
---------------------------------------------

6. The Bilateral Chamber Consultative Committee, an
informal group of business chambers representing about
3000 foreign companies with more than R360 billion ($58
billion) investments in South Africa conducted a survey
among 252 of its member companies from May to June 2004
and its findings were presented to Parliament's Trade and
Industry Portfolio Committee. Germany, France, the UK,
Italy, Sweden, the Netherlands and Finland were
represented in the survey. Of the companies that
responded, 59 percent said developments in Zimbabwe had
affected their businesses, while 79 percent rated
government's HIV/AIDS policy as "bad to very bad". In the
recent survey, 78 percent of respondents found the economy
to be satisfactory to excellent, compared with 31 percent
in 2002, and 95 percent expected it to remain the same or
improve. Sixty percent felt that investment would
increase and 47 percent had created new jobs. Fourteen
percent of firms indicated intentions to disinvest, citing
this as a natural process within globalization. A
reasonable return on investment, cheap electricity and a
competitive marketplace were some of the positive economic
features cited, though the rand's volatility had caused
problems. Levels of confidence in the government had
strengthened considerably, with 53 percent expressing
increased confidence, compared with only 32 percent in
2002. Relative confidence was expressed in the future of
a market-driven economy (70 percent), balanced taxation
(53 percent), democracy (46 percent), political leadership
(34 percent), and equal opportunities for foreign business
(32 percent). However, significant concern was expressed
over corruption, the competence of the civil service,
inflexible labor regulations and crime and violence.
There was strong pessimism about the accountability of
trade unions, labor productivity, investment incentives,
and the free transfer of funds out of South Africa. While
the survey findings were positive in many areas, some ANC
Members of Parliament, including committee chairman Ben
Martins, latched on to the negative perceptions and
expressed skepticism about its objectivity and the
validity of the findings, questioning the reasons for
including question about Zimbabwe on the survey and
arguing that Zimbabwe was no different to any other
African country. Source: Business Day, October 25.
PRODUCER PRICES REMAIN LOW
--------------------------

7. The producer price index (PPI) increased 1.4 percent
in September, lower than the Reuters consensus view of 1.8
percent. The main contributors to September's rise were
increases in the prices of petroleum and coal products as
well as the prices of basic metals. While oil prices are
still high, the rand maintained its strength, averaging
R6.5 per dollar in September. The rand has strengthened
further in October, offsetting some of the inflationary
impact of rising oil prices. Domestic producer prices
increased by 2.4 percent while imported producer prices
declined by 1.7 percent. Lower electricity prices,
declining by 28 percent as Eskom switched from higher
winter prices to summer, contributed to September's
moderation in producer inflation. Source: Business
Report, October 29; Standard Bank PPI Alert, October 29.

FRAZER

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