SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER JULY 2, 2009

UNCLAS SECTION 01 OF 04 PRETORIA 001343

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 JULY 2, 2009
ISSUE

PRETORIA 00001343 001.2 OF 004



1. (U) Summary. This is Volume 9, issue 26 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:

- Deficit Yawns Wider as Spending Accelerates and Revenues Decrease
- Credit Growth Slows
- Consumer Confidence Surprises
- Moody's Says South Africa's Credit Rating Hinges on 4% Growth
- Passenger Rail Upgrades Could Be Approved This Year
- Industry Calls for Competition, Not Legislation
- South African Maritime Trade Buoyant Amid Global Recession
- SASOL China Coal-to-Liquids Project Expected to Launch Next Year

End Summary.


--------------
Deficit Yawns Wider as Spending
Accelerates and Revenues Decrease
--------------


2. (U) Nedbank economists Dennis Dykes and Carmen Altenkirch have
warned that South Africa's budget deficit is likely to balloon to
between R121 billion ($15.1 billion) and R128 billion ($16 billion)
this year, and to as much as R153 billion ($19 billion) in fiscal
2010/11. The forecast shortfalls would push the deficit to between
5.1% and 6.1% of GDP, up from the 3.9% that former Finance Minister
Trevor Manuel forecast in his February budget for the current year
and the 3.1% deficit he predicted for next year. Current Finance
Minister Pravin Gordhan added to the bleak fiscal outlook this week,
warning that revenue collection could be as much as R50 billion
($6.4 billion) to R60 billion ($7.6 billion) below the R659 billion
($84.4 billion) target this financial year if trends continued.
State plans to boost spending on services and on the poor could come
under severe strain, making it harder for President Jacob Zuma's
administration to make good on its Polokwane promises to increase
benefits and service delivery. Gordhan told the Cabinet that the
prospects for domestic economic growth were "worrying." Gordhan
said the revenue shortfall would be made up by borrowing more rather
than cutting back on state spending. However, that would limit the
government's options as a higher interest bill would mean more
moderate growth in state spending once the recession was over. "We
have the fiscal space to maintain our spending by borrowing more
today, but this space is not limitless, and it has implications for
how much room we have in future," cautioned Gordhan. "Increasing
our deficit today as a result of falling revenue is a sensible
economic strategy to cushion our economy from the effects of the
downturn. Increasing spending further when revenue is falling,
especially spending that cannot easily be reversed, cannot be
justified." The government would have to continue with its efforts
to rein in inflation, which undermined South Africa's
competitiveness. Deputy Finance Minister Nhlanhla Nene emphasized
the need for the government to get value for money for goods and
services. A "responsible and considered approach" to managing
public service remuneration was also required. He said the likely
revised deficit would push debt costs "sky high." When the budget
was tabled in February, the National Treasury forecast growth of
1.2% for 2009. However, the World Bank has recently projected that
the economy will contract by 1.5% in 2009, while some economists
Qthe economy will contract by 1.5% in 2009, while some economists
forecast a contraction of 2%. Economists are also worried that
heavy government borrowing to fund current and capital spending
would suck up funds that might otherwise have gone towards private
sector fixed investment that is necessary to position South Africa
for the growth turnaround when it happens. (Business Times and
Business Day, June 28 and July 2, 2009)

--------------
Credit Growth Slows
--------------


3. (U) Consumers continue to stay away from the shops, according to
the latest credit data published by the South African Reserve Bank
(SARB). Growth in demand for credit by the private sector eased
from 8.5% year-on-year (y/y) in April to 5.70% y/y in May, the
slowest pace in five years. This was also well below economists'
forecasts. Nedbank economist Denis Dykes said the
lower-than-expected number was due to a sharp monthly fall in the
"other loans and advances" category as well as installment sales and

PRETORIA 00001343 002.2 OF 004


leasing finance. He said growth in asset-backed credit weakened
further, rising at its slowest pace since mid-2000, as poor economic
prospects made consumers reluctant to borrow and banks more hesitant
to lend. Dykes expects growth in credit to slow further during the
remainder of 2009. (Business Day, June 30, 2009)

--------------
Consumer Confidence Surprises
--------------


4. (U) Consumer confidence continued to rise in the second quarter
of 2009 even though the economy is in a recession, according to data
compiled by First National Bank (FNB) and the Bureau of Economic
Research (BER). The FNB/BER consumer confidence index (CCI)
increased by three index points, from +1 in the first quarter of
2009 to +4 in the second. "At first glance, this rise comes as a
surprise," said FNB Chief Economist Cees Bruggemans. "With the
economy having completed two quarterly declines in economic growth,
from the fourth quarter of 2008 to the first of 2009, with the
second quarter of 2009 also shaping as a decline, and with the third
quarter probably being touch and go, we are still in recession and
some way from exiting it," Bruggemans said. However, in the most
recent survey, more consumers expected economic performance to be
better in 12 months time compared to the previous survey.
Bruggemans said many consumers are convinced that the economy will
perform better in a year's time due to the dramatic cut in the
interest rates, the April election outcome, promises of jobs, the
increase in social grants, the recovery in share prices, and the
strengthening of the rand. (Fin24, June 30, 2009)

--------------
Moody's Says South Africa's Credit Rating
Hinges on 4% Growth
--------------


5. (U) South Africa's credit rating is dependent on the country
returning to an economic growth rate of 4%, according to Moody's
Investors Service. "The biggest consideration for the rating is
whether South Africa can regain the 4% growth rate that we thought
was the baseline" for the economy, Moody's Vice President of
Sovereign Risk Kristin Lindow commented. "We're somewhat worried
that we've overestimated that potential," she added. Moody's rates
South Africa's long-term foreign currency debt at Baa1, the
third-lowest investment grade. On March 12, Moody's affirmed its
positive outlook on the rating, while placing the nation's A2 local
currency rating on review for a downgrade. Rival Standard & Poor's
has a BBB+ sovereign rating for South Africa with a 'negative'
outlook. "The market tends to focus on the foreign currency rating,
but we view the domestic rating as the main assessment of a
country's fundamental creditworthiness," Lindow said. "That's
particularly true in South Africa's case because the country is
heavily reliant on the domestic market for its debt funding." About
84% of South Africa's "total debt stock" is denominated in domestic
currency. (Bloomberg, June 25, 2009)

-------------- --------------
Passenger Rail Upgrades Could Be Approved This Year
-------------- --------------


6. (U) State-owned Passenger Rail Agency of South Africa (PRASA)
Q6. (U) State-owned Passenger Rail Agency of South Africa (PRASA)
hopes to receive the go-ahead from Cabinet later this year for a
proposed R80 billion ($10 billion),rolling stock program. Prasa
CEO Tshepo Lucky Montana said the 6,800 new coaches would be
deployed by its Metrorail commuter rail service. "We expected the
decision on whether we could go ahead with the project last year,
but then the political landscape changed, and the economic recession
hit. I really hope it can happen this year, as the lead time on
procuring new rolling stock is three years," Montana stated.
Metrorail would need around 560 to 600 new coaches a year for a
period of ten to twelve years. This number was reportedly aligned
to projected passenger growth, which was currently expanding at 8% a
year. The current R7 billion ($875 million),three-year coach
refurbishment project was merely sustaining Metrorail fleet
operations, and would do so for the next five years. "The
refurbishment project is buying us time, but it is not a long-term
solution," argued Montana. (Engineering News, June 26, 2009)

--------------
Industry Calls for Competition, Not Legislation

PRETORIA 00001343 003.2 OF 004


--------------


7. (U) Newly-appointed Minister of Communications Siphiwe Nyanda
warned communications technology operators that if discussions do
not bring prices down, the government will resort to legislation.
Industry analysts reacted with skepticism to Nyanda's plan to
appoint experts to recommend government intervention, but were
optimistic that he recognized the need to address high ICT costs.
South Africa's high ICT costs are a result of a failure to
liberalize the market, according to independent reports from Gemini
Consulting and the World Economic Forum. The Independent
Communications Authority of South Africa (ICASA) has held countless
enquiries, yet has rarely taken action. ICASA examined handset
subsidies, and decided little had to change. It scrutinized the
fees that operators pay to link a call from one network to another,
but has not forced them down. It also talked about allowing all
operators to share the copper lines that give state-controlled
Telkom exclusive access to customer premises, but industry is still
waiting. Most operators believe the answer is competition, not
regulation, and that is something the government has stifled.
Efforts to control broadband infrastructure through state-owned
Infraco and its refusal to let state-owned Sentech raise private
cash to fund its broadband services are prime examples. More
damaging was its long protection of Telkom's monopoly through laws
quashing other players. Optimism that Nyanda will liberate what the
previous Minister of Communications Ivy Matsepe-Casaburri paralyzed
gives cause for hope, but the methods may need refining. Although
Nyanda acknowledges that more competition may be needed, he
emphasizes a need for intervention in forcing the operators to bring
down costs. Analysts hope that new undersea telecoms cables like
SEACOM -- funded by the private sector -- and competition will do
what the government and ICASA failed to do. Telkom's Godfrey Ntoele
said it has been aligning its prices to be more competitive and must
reinvent its business to face fresh competition. The same applies
to the mobile players, who are spending billions of rands to boost
capacity in response to scathing criticism from users that are tired
of the existing congested networks. (Business Day, June 26, 2009)


--------------
South African Maritime Trade Buoyant Amid Global Recession
--------------


8. (U) Maritime trade in South African waters has shrugged off the
recession and seems to be the rare bright spot in the gloomy
international shipping industry, a local shipping firm said last
week. Ocean Africa Container Lines CEO Andrew Thomas said the South
African coastal market remained largely unchanged. The global
shipping industry is grappling with shrinking world trade volumes
and excess new ships. Thomas said Ocean Africa Container Lines
handles about 500,000 tons of cargo per year, mainly sugar, paper,
malt, and wheat between the domestic ports in Durban and Cape Town.
Other South African ports (Coega, Port Elizabeth, Richards Bay, and
Saldanha Bay) have been busy due to high demand for bunker services
as ships travel around the Cape of Good Hope and avoid using the
Qas ships travel around the Cape of Good Hope and avoid using the
Suez Canal, the Red Sea and the Gulf of Aden. Unical Bunker
Services CEO Russell Burns said there was an increase in sales of
bunker fuel, boosting a wide range of port support services. He
said the low cost of bunker fuel had made it easier to divert
European and east-bound traffic around the Cape of Good Hope rather
than using the Suez Canal. The piracy threat in the Gulf of Aden
has contributed to a marked increase in traffic calling at the Port
of Durban for bunker fuel. Thomas remarked that the company had not
seen a significant decline in volumes because basic commodities such
as wheat were also still in demand. (Business Day, June 29, 2009)

--------------
SASOL China Coal-to-Liquids Project
Expected to Launch Next Year
--------------


9. (U) State-owned Sasol, the world's biggest coal-to-oil producer,
and China's largest coal producer Shenhua Group are expected to
launch construction of a coal-to-liquids (CTL) plant in China by
October 2010. The total investment in the project is estimated at
$7 billion, up from the original estimate of $5 billion. The
project is still going through a feasibility study. The study
results are expected to be submitted to China's economic planning
commission, the National Development and Reform Commission, by the

PRETORIA 00001343 004.2 OF 004


end of the year. The plant is one of the two CTL projects that got
a green light from Beijing to proceed last year. It is expected to
convert 3.2 million tons of coal into oil products each year upon
completion, equivalent to 80,000 barrels of oil output each day.
The other exception from the ban on CTL projects also belongs to
Shenhua Group. (Engineering News, June 22, 2009)