SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER JANUARY 18,

UNCLAS SECTION 01 OF 03 PRETORIA 000119 SIPDIS DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND TREASURY FOR TRINA RAND 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 JANUARY 18, 2008 ISSUE PRETORIA 00000119 001.2 OF 003 ¶1. (U) Summary. This is Volume 8, issue 3 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - House Price Growth at Lowest Level in Seven Years - Rate Hikes Hammer Retail Sales - JSE Down - Not All Lenders Comply With NCR - First Greenfield IPP Targets Ground-breaking - SA Business 'Still Optimistic' - U.S. Second Largest Market for Overseas Tourists End Summary. -------------- -------------- House Price Growth at Lowest Level in Seven Years -------------- -------------- ¶2. (U) According to the latest Absa House Price Index, growth in house prices in the middle-segment of the market (80m2 - 400m2) slowed from 12.5% y/y in November to 11.2% y/y in December 2007, which brought the average price of a house to almost R964,000 ($140, 000) at year-end. This was the lowest price growth since December 1999, when it was 9.3%. House prices increased on average by 22.5% in 2005, 15.2% in 2006 and 14.5% in 2007. ABSA forecast house price growth may drop to as low as 9% in 2008 after the downward trend in price growth accelerated towards the end of 2007. Lower growth in house prices is largely driven by the tightening of monetary policy since mid-2006, the impact of the National Credit Act on the growth in credit extension to consumers, as well as an expected slower pace of economic expansion and lower growth in real household disposable income during the course of the year. (ABSA Newsletter, January 15, 2008) -------------- Rate Hikes Hammer Retail Sales -------------- ¶3. (U) According to Statistics South Africa (StatsSA) data, retail trade sales growth slowed down from a low 1.8% y/y in October to 0.2% y/y in November 2007, its lowest pace in nearly five years. Retail sales growth slowed for four quarters in a row, which is worrying as this is the third-biggest sector of the economy, making up 14% of gross domestic product (GDP). Analysts said higher interest rates continue to curb consumer spending, the economy's main growth engine. The South African Reserve Bank (SARB) hiked 
interest rates by four percentage points in the past 18 months to fight inflation, which still breached the upper end of its 3%-6% target for eight months running. Economists pointed out that although past interest rate increases have already had an impact on spending, the full effect of some of the past interest rate increases still need to filter through the economy. Consequently, retail trade sales growth is likely to slow down further, with real sales growth likely to move into negative territory in the coming months. The latest retail sales data indicate a slowdown in economic activity in the fourth quarter of 2007, a trend that is likely to persist into 2008. However, the question for many analysts is whether slower economic growth will outweigh the inflation risks from high international oil prices and food prices, second round inflationary pressures and the prospects of electricity and other tariff increases when the SARB Monetary Policy Committee meets on January 31. (Business Day, January, 17, 2007) Qmeets on January 31. (Business Day, January, 17, 2007) -------------- JSE Down -------------- ¶4. (U) The Johannesburg Stock Exchange (JSE) has fallen almost 16% since October, with investors increasingly worried about economic woes in the U.S. and other developed country markets. The JSE fell 2.4% on January 16 alone, following Asian and European markets downward on news of record losses at Citigroup and poor retail sales in the U.S. Bonds also weakened moderately and the Rand weakened substantially, nudging close to R7/$1. "The U.S. is most certainly in a recession and the news flow has been terrible," said Patrick Mathidi, an investment advisor at RMB Asset Management. According to John Cairns, a currency strategist at RMB, international investors are withdrawing funds from emerging markets, dragging down equities and the Rand. The decline in the JSE suggests that the PRETORIA 00000119 002.2 OF 003 South African economy has not de-linked from the U.S. economy, as some local analysts have argued. (Business Day, January 17, 2008) -------------- Not All Lenders Comply With NCR -------------- ¶5. (U) The National Credit Regulator (NCR) has warned that lenders risked being fined up to 10% of their annual turnover if they failed to comply with the National Credit Act (NCA),which was promulgated in 2007 to protect borrowers. The warning came amid reports that some of South Africa's larger borrowers had failed to submit quarterly reports in the manner prescribed by the NCA, much to the annoyance of the NCR. One NCR official told journalists that some of the reports received from "larger lenders" in the quarter ending November 2007 had been returned for further work. "The quality of submissions varies," she said. "In some cases, systems need to be reviewed to ensure reporting requirements are met." (Business Day, January 14, 2008) -------------- First Greenfield IPP Targets Ground-breaking -------------- ¶6. (U) The South African Independent Power Producer (IPP) AES Khanya consortium announced that its construction start for two open-cycle gas-turbine power stations would be delayed to February due to delays in closing financing. Department of Minerals and Energy (DME) Chief Director: Electricity Ompi Aphane said the stations would still come on line by the end of 2009. The two power plants will together add 1,000 MW to the national grid and will be located in KwaZulu-Natal and Coega in the Eastern Cape. DME estimated the cost of the plants at $750 million, of which $120 million would be from foreign direct investment. The AES Khanya project represents the first IPP involved in a significant greenfield project. The consortium is led by U.S.-based AES and incorporates local partners Tiso Energy, Mbane Power and the Kurisani Trust. (Engineering News, January 10, 2007) -------------- SA Business 'Still Optimistic' -------------- ¶7. (U) According to a survey by global audit firm, Grant Thornton, the majority of privately held businesses in South Africa are still optimistic about the country. The survey researched the expectations of privately held businesses in 34 countries. In South Africa the research was conducted among 30 privately held businesses that employ 100-400 staff. More than 75% of the businesses were optimistic about South Africa, ranking it as the ninth-most optimistic country of those surveyed. Also, South Africa was found more optimistic than the global average of 42%. The most optimistic province was Gauteng, at 85%, and the least optimistic province was the Western Cape, at 67%. (Business Day, January 15, 2008) -------------- --- U.S. Second Largest Market for Overseas Tourists -------------- --- ¶8. (U) The U.S. has overtaken Germany as South Africa's second largest overseas tourism market. Statistics South Africa (StatsSA) reported that the U.S. represented the largest overseas growth Qreported that the U.S. represented the largest overseas growth market for tourism in 2007, the sixth successive year of growth for U.S. arrivals. A favorable exchange rate is expected to drive continued growth of U.S. travelers. South Africa Tourism Chief Operating Officer Didi Moyle stated that going forward, air travelers would drive growth in South Africa's tourism sector. She noted that growth in this market will depend on continuous and seamless increases in air travel capacity. Moyle added that South Africa is now looking to the markets of the future, such as India and China. Stats SA reported that as of October 2007 arrivals from India grew by 21% y/y and arrivals from China grew by 11% y/y after a period of decline. Arrivals from Brazil and other South American countries are also reported to be on the rise. Additionally, the World Travel and Tourism Council said the growth potential of South Africa's tourism market outstripped that of competing destinations in Africa. The tourism sector has become one of the largest contributors to South African gross domestic product (GDP). Foreign arrivals contributed R222 billion ($32 billion) to South Africa's PRETORIA 00000119 003.2 OF 003 economy between 2003 and 2006. The South African tourism industry grew by 13.9% y/y in 2006 compared to a global tourism growth of only 4.5% y/y in 2006. Southern African Development Community (SADC) countries represent the largest tourism market for South Africa and generate more than 60% of South Africa's tourism revenue. The growth in land arrivals from SADC countries is attributed to increased integrated economic development of the region and much of the travel is driven by wholesale and retail shopping trips. The SAG's Accelerated and Shared Growth Initiative (ASGISA) has designated tourism as an "immediate high priority" sector. Business leaders welcome this prioritization and note that this sector is labor-intensive and has the potential to generate more jobs than manufacturing. (Business Day, January 16, 2007) BOST