SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER DECEMBER 26,

UNCLAS SECTION 01 OF 03 PRETORIA 002755 DEPT FOR AF/S/; AF/EPS; EB/IFD/OMA USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND TREASURY FOR TRINA RAND USTR FOR JACKSON 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 DECEMBER 26, 2008 ISSUE PRETORIA 00002755 001.2 OF 003 ¶1. (U) Summary. This is Volume 8, issue 52 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - No House Price Recovery in '09' - Third of South African Firms Plan Layoffs - Markets End Bad Year - European Commission Offers Tariff Deal - Independent Peaking Power Plant Negotiations Ongoing - Not all Doom and Gloom in Mining - Harmony Gold Raises Capital - Unilever Company Abandons the Hoodia Plant Initiative End Summary. -------------- No House Price Recovery in '09' -------------- ¶2. (U) More than 100,000 homeowners are two months behind in their mortgage payments and more than 30,000 are four months behind, reports the Alliance Group. The homeowners' payments are tardy despite the South African Reserve Bank's (SARB) recent interest-rate cut of 50 basis points. Analysts do not expect that the situation will improve soon unless interest rates are aggressively reduced. Alliance Group Chief Executive Rael Levitt said it would take a rate cut of more than four percentage points to rectify the situation. He points out that since the middle of 2008 the residential property market has been in freefall, becoming flooded with houses, and resulting in lower house values. In the third quarter of 2008 banks tightened their lending criteria, particularly for new housing finance, and the number of homeowners in a negative-equity situation increased. Levitt expects 5% of all homeowners will experience negative equity by the middle of next year. According to Rode & Associates economist Erwin Rode, this applies largely to first-time buyers who bought a house after 2006. Rode expects no dramatic improvement in either the demand for residential property or its pricing in 2009. He foresees a fairly extended recession with demand for residential property only beginning to improve in 2010. (Fin24, December 23, 2008) -------------- Third of South African Firms Plan Layoffs -------------- ¶3. (U) According to a KPMG survey of 120 leading South African businesses, more than 35% are likely to lay off workers as higher interest rates and slowing local economy eat into their profits. The survey further found that 65% planned to encourage their workers to take voluntary attrition. Almost 23% of the survey respondents felt that, in the current economic circumstances, the interest rate should be significantly lower; 60% supported a moderate lowering of rates. Respondents also believe that government should focus its infrastructure spending on energy in 2009, and that energy spending would have the most advantageous effect on the South African economy. But in general the survey found that business people are confident about the country economic outlook, with respondents quoted as saying, "South Africa will get out of the starting blocks better and quicker than most other countries. I am very positive about this country." (I-Net Bridge, December 23, 2008) -------------- Markets End Bad Year -------------- ¶4. (U) South African markets were hit hard by global economic Q4. (U) South African markets were hit hard by global economic turmoil in 2008. The Johannesburg Stock Exchange (JSE) shed 28% over the course of the year, dropping 37% since its high point in May. The rand also weakened by 30% against the dollar over 2008, as investors dumped emerging market currencies and assets in a flight to safety. More bad news is likely in 2009, as companies and consumers feel the real effect of high interest rates in South Africa and recession in export markets. However, the worst may be over for the JSE, according to Simon Hudson-Peacock, head of equities at Cadiz African Harvest Asset Management. He said that negative emotion in the market has pushed asset valuations well below fair value: "I really do think we could look for 20 percent out of the equity market next year. It doesn't sound very large, PRETORIA 00002755 002.2 OF 003 but it's a good deal when you think that inflation will go below 10 percent." Jeremy Gardiner, a director at Investec Asset Management, agreed. He said that stock markets traditionally rise during recessions, and he predicted a broad-based recovery during the first half of 2009. (Business Day, December 23, 2008) -------------- European Commission Offers Tariff Deal -------------- ¶5. (U) The European Commission (EU) has made a concession in trade talks with the Southern African Customs Union (SACU. The EU has proposed a tariff deal that would align SACU's Economic Partnership Agreement (EPA) with the Trade, Development and Co-operation Agreement (TDCA),under which South Africa trades with the EU. The deal would keep SACU intact by allowing SACU to maintain its common external tariff, while allowing South Africa to balance its "regional coherence" goals with its desire for market access to the EU. SACU members Botswana, Lesotho, Namibia and Swaziland signed the interim pact last November to preserve preferential access to the EU. South Africa does not want to sign the EPA, and has since been at loggerheads with the other SACU members. South Africa's chief trade negotiator Xavier Carim noted that the deal would result in a "single SACU arrangement" and described it as "a really good development," but also noted that the deal would not resolve other concerns that South Africa has. (Business Day, December 22, 2008) -------------- Independent Peaking Power Plant Negotiations Ongoing -------------- ¶6. (U) The much-delayed Department of Minerals and Energy (DME)-spearheaded independent power producer (IPP) project is forging ahead, and a new commercial operation date has been set for mid-2011, announced DME Chief Director of Electricity Ompi Aphane. Aphane said negotiations with a consortium led by Suez Energy of France for the construction of two open cycle gas-turbine plants were proceeding and should be completed by the end of March 2009. DME received a binding offer from Suez after negotiations with the designated preferred bidder US power firm AES were terminated in April 2008 due to reported sticking points on price, commercial terms, and the dates for generation. Aphane admitted that the economic landscape had changed since the start of the project, but he believed that the power plants were an opportune project for banks to take up. Electricity demand may be lower than originally projected for 2009, but Aphane asserted that the reduced demand is a function of the economic climate and South Africa still requires energy infrastructure. The proposed project would include a 750 megawatt (MW) power station near Durban and a 330 MW plant at Coega, near Port Elizabeth, both near the Indian Ocean. (Engineering News, December 19, 2008) -------------- Not all Doom and Gloom in Mining - Harmony Gold Raises Capital -------------- ¶7. (U) Harmony Gold (Harmony) raised R979 million ($98 million) by selling 10.5 million of its shares on the open market this week and reaffirmed its capital expenditure plans. The cash would be used to Qreaffirmed its capital expenditure plans. The cash would be used to reduce its debt levels as part of a plan to have zero debt by June ¶2009. Harmony reported that it had paid to Nedbank a substantial portion of a loan due by the end of December 2008. Harmony plans to develop its pipeline of projects as planned, despite turbulent economic conditions and a grim outlook. The third-ranked South African gold company, Harmony has eleven underground mines and one opencast operation in South Africa and is currently building and expanding mines in South Africa and Papua New Guinea. (Mining Weekly, December 22, 2008) -------------- Unilever Company Abandons the Hoodia Plant Initiative -------------- ¶8. (U) Unilever has abandoned its plan to develop a weight-loss product based on South Africa's indigenous Hoodia Gordonii plant, dashing the local San community's hopes that it would soon profit PRETORIA 00002755 003.2 OF 003 from the spiny succulent. Unilever has invested over 20 million pounds ($29 million) in research on the plant over four years, in partnership with British company Phytopharm and South Africa's Council for Scientific and Industrial Research. The hoodia plant was traditionally used by San and Khoi hunters to suppress hunger and thirst during extended hunting expeditions, but it might not be safe or effective for dieters, said Unilever spokesperson Trevor Gorin. He noted that hoodia has potentially dangerous side effects, including increased blood pressure. Researchers also found that hoodia had little or no impact upon the calorie consumption of participants in a Unilever study. Unilever had since returned the development rights to Phytopharm. Phytopharm's Functional Foods Chief Simon MacWilliam is adamant that hoodia might still have potential as a commercial weight-management aide. Phytopharm is seeking new partners to continue with the development and marketing of hoodia. (Business Day, December 22, 2008)