SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER MARCH 9, 2007

UNCLAS SECTION 01 OF 03 PRETORIA 000886 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 SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV PGOV, SF SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER MARCH 9, 2007 ISSUE PRETORIA 00000886 001.2 OF 003 ¶1. (U) Summary. This is Volume 7, issue 10 of U.S. Embassy Pretoria's South Africa Economic News weekly newsletter. Topics of this week's newsletter are: - Net Reserves Increase - Investment Promotion Delegation to the U.S. - "Affirmative Action Won't be Scrapped - Trade Deficit Bad News for Current Account - SA Receives Low Tourism Ranking - South Africa Gold Production Down - Drought Affects Corn Harvest - WTO Complaint Has Consequences for MIDP - Fidentia Top Officers Arrested End Summary. Net Reserves Increase -------------- ¶2. (U) According to data released by the South African Reserve Bank (SARB),Net Gold and Foreign Exchange Reserves increased from $23.3 billion in January to $23.7 billion in February. Analysts said the increase reflected the central bank's continued efforts to improve South Africa's financial position by gradually lifting reserves without overly impacting the foreign exchange market. The rand remained relatively firm in February, edging towards R7 to the dollar, only a slight change from its level at the end of January. SARB brought the long-standing negative position in reserves into balance early in 2004 with the elimination of its loss-making forward foreign exchange book, historically the Achilles' heel of the currency. Since then, SARB has gradually increased net reserves, although the total still lags behind comparable emerging markets. (Business Day, March 7, 2007) Investment Promotion Delegation to the U.S -------------- ¶3. (U) The Department of Trade and Industry's (DTI) Minister Mandisi Mpahlwa will lead an investment promotion delegation to the U.S. in two weeks. The delegation will visit New York, Chicago, and Detroit to promote investments in the information technology, biotechnology, automotive and financial services sectors. These sectors have been targeted by DTI as most likely to attract foreign investors. According to DTI Chief Director of International Trade Iqbal Sharma, the DTI hopes to build on already existing U.S. investments as well as highlighting new opportunities. (Business Day, March 7, 2007) "Affirmative Action Won't be Scrapped -------------- ¶4. (U) Deputy President Phumzile Mlambo-Ngcuka said that as long as imbalances of the past still persist in South Africa, the government's affirmative action policy would not be scrapped. Mlambo-Ngcuka replied to a question by a Member of Parliament in the National Council of Provinces who had asked her if the government had any intentions to do away with the policy. Mlambo-Ngcuka said affirmative action was a corrective measure that could only be disbanded once its objectives had been met. She said that as long as the majority of the previously disadvantaged people were still on the margins of the economy and the majority of top managers were still white, affirmative action policy objectives had not been achieved and therefore could not be disbanded. Mlambo-Ngcuka was speaking in the wake of a raging debate sparked by African National Congress Western Cape MEC Marius Fransman, who called for the suspension of the affirmative action policy, in order to lure back skilled white South Africans who had left the country. His call received strong support from opposition parties, with the Democratic Alliance saying such a move would go a long way to addressing the country's skills shortage problem. (Fin 24, March 6, 2007) Trade Deficit Bad News for Current Account -------------- ¶5. (U) According to South African Revenue Service (SARS) data, South Africa recorded a trade deficit of R11.94 billion ($1.66 billion) in January after posting a surplus of R388 million ($54 million) in December. Compared with the previous month, exports fell by 16.7% while imports increased by a much larger than expected 17.2%. Market analysts consider the trade deficit as unhealthy for the current account, which is already in bad shape. Although South Africa's current account deficit has been fully financed by capital PRETORIA 00000886 002.2 OF 003 inflows in recent years - a high proportion of these funds are portfolio investment - it has left the country vulnerable to the ebbs and flows of international investment and emerging market sentiment. The current account deficit and its impact on the rand and inflation remains one of the key concerns of the Reserve Bank. (Fin 24, March 1, 2007) SA Receives Low Tourism Ranking -------------- ¶6. (U) The World Economic Forum's (WEF's) Travel and Tourism Competitive Index for 2007 ranked South Africa 62nd out of 124 countries. The index measured factors which make investment in the tourism industry attractive. These factors included environmental policy, safety and security, health and hygiene, air and ground infrastructure, and information and telecommunication technology. Although South Africa was rated high on most factors, the country's overall drop in ranking is attributed to its high risk in the safety and security, and health and hygiene factors. According to the WEF, the high rate of violent crime, lack of adequate sanitation facilities, and the low density of medical doctors and health facilities in some areas are the greatest concerns for potential tourists and investors. Meanwhile, the Executive Director of the South African Tourism Services Association (SATSA) views South Africa's low ranking as a harsh judgment that may discourage people from visiting the country. A German-born local hotelier said he could understand the concern about the crime rate, but argued that he saw no problem in health and hygiene for people who planned to invest in the tourism industry in South Africa. South African Tourism CEO Moeketsi Mosola conceded that South Africa had some challenges and that they are working to address them. (Business Day and Business Report, March 2, 2007) South Africa Gold Production Down -------------- ¶7. (U) There has been a steady decline in South African gold output since 1970, when gold production went above 1,000 tons. This decline culminated in 2006 when only 275 tons were produced. According to the Chamber of Mines, total production declined 7.5% in 2006 and this is the lowest level of output since 1922 when major strike action reduced output to 218 tons. The lower output was generally expected as miners adapted to the higher rand gold price and took the opportunity to mine lower grade ore at a profit, thus extending their mine lives. The average grade in 2006 was 14% lower than the 2005 level. On the positive side, buoyed by the record higher rand gold price during 2006, capital expenditure on gold mines recovered to just under R6 billion ($850 million). There is a possibility that one of the other major gold producing countries such as Australia, the United States or China may have taken over as the world's leading gold supplier in 2006, a ranking that South Africa has enjoyed for more than 100 years. Australian gold output in 2005 was 263 tons, the U.S. 262 tons, and China 224 tons. Drought Affects Corn Harvest -------------- ¶8. (U) Hot and dry weather has continued across the corn-producing areas of South Africa and Zimbabwe. FAS/Pretoria now estimates that South Africa's commercial corn farmers will harvest 6.75 million tons this year. This is down from the initial estimate of 9.75 million tons. The decline in corn and other grain harvests will cause the agricultural sector to contract so much that it could reduce the country's overall GDP growth by as much as 0.5% in 2007. High corn prices will also have an impact on corn meal, beef and poultry prices, putting pressure on inflation and increasing the cost of living for the poor, the poorest of whom spend as much as half of their income on food. Imports of up to 1.5 million tons of yellow corn, likely from Argentina, will be required. WTO Complaint Has Consequences for MIDP -------------- ¶9. (U) Mexico's recent complaint brought before the WTO against China may have ramifications in South Africa. The complaint alleges that China's incentive program for local manufacturers to boost the use of local content in domestic production is incompatible with WTO rules as it discriminates against foreign products beyond tariff concessions. China's program requires enterprises to meet certain PRETORIA 00000886 003.2 OF 003 export performance criteria, which Mexico contends is the same as an illegal subsidy. South Africa has focused on expanding its motor industry through a similar incentive program, the Motor Industry Development Plan (MIDP). This program also includes export criteria, which would fall into the same illegal category as China's program should Mexico prevail. The Department of Trade and Industry is currently revising the MIDP to avoid these potential violations of WTO regulations. (Business Day, March 7, 2007 and Embassy contacts) Fidentia Top Officers Arrested -------------- ¶10. (U) Police have arrested top officers of Fidentia, a Cape Town-based asset management firm that was placed into curatorship (receivership) a month ago. Regulators took Fidentia to court when they discovered that Fidentia's cash resources had dwindled to almost nothing and that more than R400 million ($55 million) of $1.6 billion ($220 million) being managed by the firm could not be accounted for. The scandal has generated a wave of publicity, as Fidentia's largest client was the Living Hands Trust, which invested the funds of widows and orphans of mineworkers. Some Fidentia officers were trustees of Living Hands, suggesting conflicts of interest. The collapse of Fidentia has generated calls for more power to be vested in the Financial Services Board. (Business Day, March 8 and 9, 2007) BOST