South Africa Commercial Banking Report Q1 2008

From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

South Africa's overall CBBER is 67.8. The equivalent figures for the US and the eurozone are 84.8 and 81.4, respectively. South Africa's CBBER is higher than that of any other country in the Middle East and Africa - and higher than any of the Central and Eastern European states surveyed by BMI, except Greece.

Within the CBBER, the most important aspect is the banking market element of the limits to potential returns. This element accounts for 42% of the overall CBBER. South Africa's rating for this element (71.9) is higher than the overall CBBER and higher than the country element of the limits to potential returns (56.5). It is widely known that South Africa has a highly sophisticated commercial banking sector.

(This is a point that is also reflected in the extremely high scores for South Africa's regulatory framework and the high ratings ascribed to local currency deposits by ratings agency Moody's Investor Services.) What is not so well known is just how large the total assets of South Africa's banking sector are, relative to those of other countries. Moreover, the absolute growth in total assets and client loans during the 2007- 2012 forecast period will likely be surpassed in only a few of the developing countries surveyed by BMI.

Nevertheless, the CBBER highlights the factors holding back South Africa's banking sector. One is a relatively low level of per capita GDP, which is exacerbated by an uneven distribution of income.

Another is bureaucracy. However, the most important constraint is the volatility of the economy over the long term; this is, to be fair to the authorities, largely the result of external risks and challenges.

Recent economic data support our broadly sanguine view on the path of the economy. Perhaps most conspicuously, the country's current account deficit narrowed to 6.5% in Q207, from a downwardly revised 6.9% in the preceding quarter. The South African Reserve Bank (SARB) attributed this to continued strong global demand, driven by India and China in particular , for South Africa's exports. But import pressures are unlikely to subside over the coming years, given the government's enormous infrastructural upgrade plans, which require the purchasing of machinery and equipment abroad. The trade deficit shrunk from ZAR50.9bn in Q1 to ZAR31.4bn in Q207, aided by a slowdown in domestic expenditure and a slight improvement in the country's terms of trade. But this improvement in the trade account was partly offset by a fairly dramatic rise in net service, income and current transfer payments.

Economic activity remains robust, although overall expansion softened to 4.5% in Q207, from 4.7% in Q1. Domestic consumption lost steam in Q2, registering a paltry 1% year-on-year (y-o-y) growth, as opposed to 5.75% in Q1. All three components of final demand - consumption expenditure by households, government and gross fixed capital formation - slackened in the second quarter.