SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER JUNE 19, 2009

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SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER JUNE 19, 2009
ISSUE

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1. (U) Summary. This is Volume 9, issue 24 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:

- Weak Exports Put Pressure on Current Account Deficit
- Consumers Avoid Spending
- Employment Outlook Still Weak
- ZUMA and Manuel Scold COSATU for Threats of Labor Unrest
- Minister Holds Out Olive Branch to White Commercial Farmers
- Trade and Industry Minister Discusses Future of South African
Trade
Policy
- Delta Suspends Cape Town Flight
- South African Tourism Resilient During Tough Times
- Gold Firms and Unions Meet Over Wages
- Westinghouse Expert to Highlight Chinese Localization Model
During Visit to South Africa
- Poverty and Dropout Rates

End Summary.


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Weak Exports Put Pressure on Current Account Deficit
-------------- --------------


2. (U) South Africa's deficit on the current account widened from
5.8% of GDP in the fourth quarter of 2008 to 7% of GDP in the first
quarter of 2009, way above consensus forecasts for a deficit of 6%
of GDP. The key driver of the deterioration in the current account
deficit was the worsening in the trade balance, which widened from
0.8% of GDP in fourth quarter to 2.3% of GDP in the first quarter,
with exports diving by an annualized rate of 19.4%, the fastest on
record. Analysts believe that weak domestic demand conditions, some
improvement in the global outlook in the second quarter of 2009, and
downward pressure on interest and dividend payments to non-residents
owing to weak company profits should keep the deficit in check for
the remainder of 2009. As for financing the current account
deficit, analysts believe that the global South Africa economic
environment has improved, and is likely to improve further, as
investors become more willing to purchase South African equity and
securities. (Business Day & ABSA Newsletter, June 19, 2009)
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Consumers Avoid Spending
--------------


3. (U) Retail sales dropped by 6.7% year-on-year (y/y) in April as
the economic climate put the brakes on consumer spending, according
to Statistics South Africa figures. This follows a 4.9% decline in
March. South Africa has now entered its first recession in 17 years
and households' unhealthy finances combined with job losses and
concerns about job security are weighing heavily on consumers.
April's retail sales figure was partly due to the Easter holidays
and the national elections falling in April this year and
contributing to weak demand. Economists are expecting retail sales
to stabilize towards the end of the year as lower interest rates
work their way through the country's economy. (Fin24, June 17,
2009)?
--------------
Employment Outlook Still Weak
--------------


4. (U) The overall environment for employment in South Africa has
become much more negative, according to the latest Adcorp Employment
Index. The index showed a decline of 12.9% quarter-on-quarter (q/q)
in the first quarter of 2009, influenced by the decline in
macro-economic activity (-17.1%) and demand for labor (-5.7%). This
Qmacro-economic activity (-17.1%) and demand for labor (-5.7%). This
trend is expected to continue until the second or third quarter of

2010. Construction, logistics and warehousing, communications and
information technology, government, and personal services sectors
remained robust and were showing net employment growth, according to
the index. "The sectors that are under substantial strain and show
employment losses are mining, manufacturing, retail and wholesale
trade as well as finance, real estate and business services," stated
Adsorb Holdings Chief Executive Richard Pike. Certain skills
remained in high demand, he noted, particularly in the financial
services, engineering, natural and physical sciences, medical and
health, education, and information and communication technology

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sectors. The remuneration index was also down by 5.6%. Salary
increases were tracking at between 8% and 9%, but were expected to
decline to between 6% and 8% by the end of 2009. Some companies are
in their third round of employment cuts as they struggle to remain
afloat in the face of lower demand, and other cuts are still to
come. (Fin24, June 17, 2009)

--------------
Zuma and Manuel Scold COSATU for
Threats of Labor Unrest
--------------


5. (U) South African President JACOB ZUMA and Minister in Charge of
National Planning Trevor Manuel questioned the motives and
effectiveness of persistent strike threats made by the Congress of
South African Trade Unions (COSATU) at the World Economic Forum
meeting that took place in Cape Town June 12-14. ZUMA criticized
COSATU's multiple threats of labor unrest, including planned strikes
against Cape Town Premier Helen Zille's all-male cabinet, the South
African Reserve Bank's interest rate policies, government-supported
bus rapid transit implementation, and low public sector wages. ZUMA
argued that strikes may exacerbate the effects of the global
economic downturn and deter foreign investment. Manuel further
suggested that businesses should take a more active role in standing
up to industrial action, and warned labor that excessive striking
would limit its effectiveness as a tool. A COSATU delegation met
with members of government to discuss the tension that has escalated
between the government and labor. COSATU characterized the meetings
as positive but declines to back down. The trade union federation
issued a press statement noting the distinction between Zuma's and
Manuel's remarks. COSATU praised ZUMA for emphasizing negotiation
but criticized Manuel because they believe he is attempting to
marginalize of the role of organized labor. COSATU's push for power
in the new ZUMA administration is being heavily monitored by the
South African press. (Business Times - June 13, 2009; The Star -
June 16, 2009; Business Report - June 17, 2009; COSATU Press
Statement, June 15, 2009)

--------------
Minister Holds Out Olive Branch to
White Commercial Farmers
--------------


6. (U) Minister of Agriculture Tina Joemat-Pettersson has offered an
olive branch to organized agriculture by acknowledging that without
white commercial farmers, neither transformation nor food security
can be achieved in South Africa. The Department of Agriculture's
mandate was to turn South Africa into a net exporter of food,
Joemat-Pettersson stated. She added, "We recognize that without
organized agriculture we cannot have a turnaround strategy for
agriculture in this country." Joemat-Pettersson reassured the
agricultural sector that assistance would not be confined to
subsistence farmers and that commercial agriculture was vital to the
turnaround strategy. Creative solutions for white farmers would be
sought in the form of joint ventures with black farmers. "If 30% of
agricultural land is to be in black hands, then there has to be an
alternative for white farmers because we do not seek to drive them
from the land," Joemat-Pettersson insisted. Joemat-Pettersson's
Qfrom the land," Joemat-Pettersson insisted. Joemat-Pettersson's
predecessor Lulu Xingwana had earned the ire of white farmers for
accusing them of brutalizing farm workers. Not all white farmers
abused the human rights of their workers, Joemat-Pettersson
countered, and the government would be strict in enforcing the
security of tenure of farm workers and their conditions of
employment. Joemat-Pettersson said she intended to bring all of the
agricultural unions closer to one another and closer to the
government because there was too much distance between them.
(Business Day, June 19, 2009)

--------------
Trade and Industry Minister Discusses
Future of South African Trade Policy
--------------


7. (U) Trade and Industry Minister Rob Davies expressed "grave
concerns" about some of the clauses in the interim economic
partnership agreement (EPA) between the European Union and three
members of the Southern African Customs Union (SACU),but he
emphasized that the EPA should not be allowed to undermine SACU.
"We don't want the EPA process to create tension in SACU ... South

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Africa is in favor of deeper integration in SACU." Davies also
commented on the restructuring of the Department of Trade and
Industry (DTI). He does not plan to dismember the DTI, but rather
to create a department that could give greater predictability. The
department would consider redrafting the industrial policy action
plan but not the national industrial policy framework, Davies noted.
The new plan would be a three-year plan linked to the mid-term
expenditure framework. (Business Day, June 17, 2009)

--------------
Delta Suspends Cape Town Flight
--------------


8. (U) Delta Airlines has confirmed plans to suspend its Cape
Town-Atlanta service at the end of August. "Given projected demand
levels, Delta confirms that it will be suspending its Cape
Town-Atlanta service via Dakar," said Delta Africa, Middle East, and
India Sales Director Jimmy Eichelgruen. The last service from
Atlanta to Dakar will operate on August 28 and from Dakar to Cape
Town on August 29. The last service from Cape Town to Atlanta, via
Dakar will depart on August 29. Delta remains committed to the
South Africa market and operates a daily, year-round, non-stop
service between Johannesburg and Atlanta. (Travel Hub, June 14,
2009)


--------------
South African Tourism Resilient
During Tough Times
--------------


9. (U) South Africa's tourism sector would suffer from the global
economic downturn, but it had proved more resilient than other
sectors with 6.4% more foreign arrivals in January 2009 than in
January 2008. This data compares favorably with international
trends. Provisional figures from the United Nations World Tourism
Organization indicated a fall of 8% in global international arrivals
for the first two months of 2009 against a 2% rise in 2008. South
Africa has bucked the negative global trend before. There was a
5.5% y/y increase in foreign arrivals and 23.5% growth in foreign
direct spending in 2008. South Africa has been "spared the worst,"
stated Minister of Tourism Marthinus Van Schalkwyk. Opportunities
created by the 2010 Soccer World Cup would stimulate a more rapid
recovery in foreign tourism demand in Southern Africa and would help
the local tourism sector build greater resilience against future
external economic shocks, he added. More could be done, Van
Schalkwyk said, to diversify South Africa's tourism products,
develop skills, reduce long visa processing times, ensure affordable
and more competitive air access, and develop rural tourism
infrastructure. Van Schalkwyk urged the tourism industry to not
price itself out of the market, especially during 2010. (Business
Day, June 19, 2009)

--------------
Gold Firms and Unions Meet Over Wages
--------------


10. (U) Labor unions demanding a wage increase warned last week of a
potential strike in the gold sector after wage negotiations
deadlocked. Labor unions sought a 15% increase, while AngloGold
Ashanti and GoldFields offered 7%. The current wage agreement would
lapse on June 30. South African labor courts have agreed to mediate
the dispute. Independent trade union Solidarity spokesperson Jaco
Qthe dispute. Independent trade union Solidarity spokesperson Jaco
Kleynhans commented, "A strike will not be good for the gold
industry's image right now, but workers cannot be satisfied with not
earning a living wage and getting an increase below the current
consumer price index rate." Kleynhans added, "Some want to
compensate their workers, reach an agreement and carry on with
production at the mines. Other producers first want to play a power
game that stirs up emotions and could result in a possible strike.
The Chamber of Mines forgets that the mines screeched to a halt for
five days four years ago when the National Union of Mineworkers and
Solidarity went on strike." The Chamber of Mines and labor unions
reached a similar deadlock over a 7.75% increase in 2007. The
National Union of Mineworkers and Solidarity had demanded a 15%
increase. Labor unions finally accepted increases of between 8.5%
and 10% for workers in the gold mining sector. (Mining Weekly, June
17, 2009)


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Westinghouse Expert to Highlight Chinese
Localization Model During Visit to South Africa
-------------- --


11. (U) Nuclear equipment vendor Westinghouse Electric Company is
continuing to emphasize its technology-transfer and localization
model as the main pillar of a possible bid to the South African
government and Eskom for the supply of its third-generation pressure
water reactor (PWR) technology. Westinghouse's AP1000 technology
has already been assessed, together with Areva's ERP technology, as
part of Eskom's 'Nuclear-1' procurement process, which was suspended
in December due to Eskom's financial constraints. However, the
South African government still wishes to pursue nuclear energy as a
way of diversifying away from coal, which currently comprised about
90% of the domestic electricity-supply mix. The Pennsylvania-based
company hosted a meeting of more than 100 possible South African
nuclear-industry suppliers this week. Westinghouse Project Manager
Consortium Director for AP 1000 Technology Transfer and Localization
in China Dr. Mark Crump highlighted the localization progress it has
made in China and South Korea. Crump also met with South African
government officials, officials from the U.S. and China, and members
of the Nuclear Industry Association of South Africa on the model
approach it has taken in China and South Korea. Westinghouse has a
solid record with regard to technology transfer, Crump noted.
Westinghouse is building four AP1000 reactors in China.
Westinghouse South Africa Regional Vice President Rita Bowser said
she was looking forward to greater certainty from the South African
government as to the future trajectory of South Africa's nuclear
energy program. (Engineering News, June 19, 2009)

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Poverty and Dropout Rates
--------------


12. (U) Research by the University of Cape Town's Children's
Institute (CI) indicates that poverty is "unlikely to be a
sufficient explanation" for the high number of children who drop out
of school. This is because the Gauteng and Western Provinces, by
far the two wealthiest provinces, had the largest percentage of
children out of school. Education experts have recently highlighted
their concern regarding the high drop-out rate after grade 9, when
compulsory schooling ends. Other research from University of the
Witwatersrand's School of Education found that absolute poverty did
not directly contribute to absence, although it could cause late
entry and slow progress. The same research found that relative
poverty - how children experience poverty in relation to others -
and social exclusion were key drivers of drop-out rates in grades
1-9, while the poor quality of education was the key driver for
grades 10-12. There was also evidence that the government's no-fee
schools policy, which this year aims to reach 60% of the country's
25,000 public schools, went "some way" to improving access to
education. CI researcher Katherine Hall said that increased funding
did not imply sufficient funding, and did not necessarily result in
an improvement in quality. This is because school funding does not
Qan improvement in quality. This is because school funding does not
include teacher salaries, which limits the impact of greater school
funding on student outcomes. CI Director Prof Shirley Pendlebury
said that meaningful access to education required well-conceived
textbooks and other learning materials, competent and prepared
teachers able to use a range of classroom practices, a curriculum
that built a strong basis during the foundation phase, teaching
facilities and resources such as laboratories and well-stocked
libraries, and a safe and supporting environment. Gauteng and
Western Cape Provinces are also the two provinces with the greatest
loss in ANC support during the April 22 national elections.
(Business Day, June 19, 2009)