SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER APRIL 13, 2007

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SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER APRIL 13, 2007
ISSUE


1. (U) Summary. This is Volume 7, issue 15 of U.S. Embassy
Pretoria's South Africa Economic News weekly newsletter.

Topics of this week's newsletter are:
- SARB Holds Interest Rate Steady
- Treasury Provides Bail-Out for SAA
- SAA to Buy More Planes
- Mbeki Takes a Swipe at Telkom
- Denel Faces Hard Times
- Unemployment Rate Improves, But in Low Wage Jobs
- February Inflation Better Than Expected
- SA Government Rejects Planting of GM Maize

End Summary.

SARB Holds Interest Rate Steady
--------------


2. (U) The Monetary Policy Committee (MPC) of the South African
Reserve Bank (SARB) left the repo rate unchanged at its meeting of
April 11. The MPC cited lower inflationary expectations, a stable
rand, and a positive global inflation outlook as reasons for its
decision. It noted, however, that oil prices and food prices remain
of concern, household consumption expenditure poses a risk of
inflation, and consumer confidence remains at high levels. After
reviewing the mixed inflation picture, the MPC stated that it "has
decided that despite the slight deterioration in the inflation
outlook, an unchanged monetary stance continues to be appropriate
for now." The decision was in line with market expectations. SARB
Governor Tito Mboweni said that the MPC should wait to see the full
impact of its 200 basis point hike in 2006 before it acts again.
(Business Day, April 13)

Treasury Provides Bailout for SAA
--------------


3. (U) The SA government announced on April 2 that it had decided to
provide a guarantee of 1.3 billion rand ($178 million) to
state-owned South African Airways (SAA) in what the Department of
Public Enterprises has called, "the first tranche of a
recapitalization process." The announcement means that SAA CEO
Khaya Ngqula and Public Enterprises Minister Alec Erwin have been
able to overcome opposition in the Department of Treasury, which had
been reluctant to provide a bail-out. SAA is expected to report
losses of 650 million rand ($88.8 million) for last year and says it
needs more than 4 billion rand ($570 million) to restructure
properly. This follows more than 6 billion rand of guarantees that
were provided in 2003 when the SAA's hedge book went sour. The
restructuring includes a comprehensive review of SAA's routes which
led to the postponement of the proposed May 9 launch of a new route
between Johannesburg and Chicago. The restructuring may also
include the break-up of the airline into various operating
businesses. (Business Day, April 3.)

SAA to Buy More Planes
--------------


4. (U) SAA is also moving ahead with its fleet planning process
which will result in a decision on which types of aircraft need to
be purchased for 2009, 2010 and beyond. A large tender to purchase
up to 20 Boeing or Airbus aircraft is expected to be issued in
August. SAA has a mixed Boeing/Airbus fleet, but the most recent
purchases have been from Airbus. A purchasing decision needs to be
made by mid-2007 if the new planes are to arrive before the 2010
FIFA World Cup. Boeing and Airbus production lines are both full
and it will be difficult for either manufacturer to deliver new
aircraft prior to 2010 even in the best of conditions. (Business
Day, April 4, 2007)

Mbeki Takes a Swipe at Telkom
--------------


5. (U) President Mbeki accused state telecommunications company
Telkom in a Financial Times article of "profiteering" from the
exorbitant rates it charges on the Sat-3 undersea cable which
connects SA with Europe and Asia. Mbeki described the rates as
"absolutely phenomenal" and said that a range of "interventions"
were being put in place to reduce phone charges. These
interventions include building a new, and far larger, fiber optic
cable along the west coast. Another intervention is the licensing

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of Neotel, a private telecommunications company which is already
providing competition in the provision of wholesale services and
hopes to provide retail services to companies and individual
consumers later this year. Another state-owned company, Infraco, is
expected to compete with the provision of internet bandwidth space
later this year. Yet another intervention would be to persuade
Telkom to provide special rates to potential call centers. Mbeki
said the SA government had been talking to Telkom about the
establishment of call centers, but SA was still not attracting call
centers due to the high cost of telecommunications. Mbeki's
complaints about high telecommunications costs are part of a broader
concern about microeconomic issues that create obstacles to higher
rates of economic growth, an issue he has mentioned in his state of
the nation addresses. Telkom CEO Papi Molotsane announced his
unexpected resignation on April 5. (Business Day, April 3, 2007,
Business Report, April 4, 2007 and Business Times, April 8, 2007)

Denel Faces Hard Times
--------------


6. (U) Embattled state arms manufacturer Denel was passed over for a
2 billion rand ($273 million) contract to supply the Turkish army
with 50 attack helicopters, a deal that was seen as critical to the
company's turnaround efforts and the survival of its Rooivalk attack
helicopter. The contract went instead to Italy's Agusta Aerospace.
Agusta's A129 Mangusta helicopter is considered to be
technologically superior to the Rooivalk and it will become
increasingly difficult for Denel to market the Rooivalk as its
technology becomes more dated. Denel spokesman Sam Basch said on
April 2 that Denel was trying to sell more Rooivalks to the SA Air
Force, which is the only entity that has ever purchased the
helicopter, having purchased 12 in 1999. Denel CEO Shaun Liebenberg
said that he was confident the company would be turned around in the
next four years and that the company had managed to reduce its
losses from 1.6 billion rand ($218 million) in FY2004-05 to 1.4
billion rand ($191 million) in FY2005-06. Denel recently received a
2 billion rand ($273 million) cash injection from the government and
has asked the government to recapitalize it with an additional 5
billion rand ($683 million). (Business Day, April 3-4, 2007)

Unemployment Rate Improves, But in Low Wage Jobs
-------------- ---


7. (U) The unemployment rate for the year up to September 2006
showed a slight decrease, according to the findings of the Labor
Force Survey (LFS) released this week. The LFS is a twice-yearly
household survey specifically designed to measure the labor market.
The number of unemployed persons dropped from 4.4 million in
September 2005 to 4.3 million in September 2006, which
correspondingly reduced the unemployment rate from 26.7 percent in
September 2005 to 25.5 in September 2006. The results also showed
that the number of employed people increased from 12.3 million in
September 2005 to 12.8 million in September 2006. The decreases in
the unemployment rate took place despite an increase in the labor
force from 16.7 million to 17.1 million.


8. (U) Although the LFS indicates unemployment rates improved,
Miriam Altman, the Executive Director of the Human Science Research
Council's (HSRC) Employment, Growth and Development Initiative, said
the HSRC's key findings showed that the economy was creating large
numbers of low-skilled and poorly paid jobs mostly in the service
sector. Altman claimed that to bring the jobless rate to 15% by
2014, the private sector would have to create 500,000 jobs per year,
with the public sector contributing a further 600,000 jobs. To
achieve this, an economic growth rate of 6% and a job growth rate of
4% would be needed over a 10-year period. The economy is currently
creating between 100,000 and 300,000 jobs per year. The problem is
that even though job creation has been consistently positive with an
average growth rate of 1% per year since 1995, the population has
been growing at 2.8% per year. COSATU trade union Policy
Coordinator Rudi Dicks said there are approximately 300,000 to
350,000 new entrants to the labor market each year, meaning that job
creation will fall short of the government's ASGISA goal of reducing
unemployment by half by 2014. Deputy President Phumzile
Mlambo-Ngcuka acknowledged that while the prospects for economic
growth looked brighter, "sufficient employment creation remains the
most crucial and most difficult ASGISA objective." The good news is
the economy is currently growing at 5% per year for the third
straight year and appears to be on track to achieve 6% growth by

2010. (Mail & Guardian, March 30 to April 4, 2007)

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February Inflation Better Than Expected
--------------


9. (U) February's CPI was at 5.7% year-on-year compared to 6% in
January. The CPIX inflation dropped from 5.3% to 4.9%. The decline
is attributed to the decrease in fuel prices during February. Food
price inflation, especially in grain products, continued to be high
at 8% in February, compared to 8.6% in January. CPIX less fuel
inflation was 5% in February, and CPIX less food inflation was 3.9%
compared with 4.2% in January. Food inflation is expected to
increase in the next few months due to grain crop failures from
drought conditions.

SA Government Rejects Planting of GM Maize
--------------


10. (U) The Department of Agriculture's Executive Council, which
regulates Genetically Modified (GM) organisms, has rejected a seed
company's application to grow GM maize in South Africa for the
bio-fuel industry. US biotechnology company Syngenta wanted to
plant "Maize Event 3,272," known as the first industrial GM maize in
the world, but failed to convince the SA government that the maize
was safe for food or animal feed. Executive Council Chairman Julian
Jaftha said that they were concerned that the Event 3,272 maize
could mix with maize intended for food. The Council also stated
that Syngenta did not use the World Health Organization's (WHO)
evaluation methods to test for allergens. The African Biosafety
Center, a watchdog organization monitoring the GM industry,
announced support for the government's decision. (Cape Times, March
29, 2007)

BOST