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)