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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.




E.O. 12958: N/A
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
- Banking Study Highlights High Cost to Poor; and
- July Tax Revenue Collection Stronger than Planned.
End Summary.

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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

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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.


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.

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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.

--------------------------------------------- --

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.


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

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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.


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.

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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.


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