SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER FEBRUARY 13,

UNCLAS SECTION 01 OF 03 PRETORIA 000323

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 FEBRUARY 13,
2009 ISSUE

PRETORIA 00000323 001.2 OF 003



1. (U) Summary. This is Volume 9, issue 8 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:

- Retail Sales Growth Remains Negative
- Rand Vulnerable to Higher Risk Aversion
- Special Duty on Textiles Considered
- SAA Tells Government It Will Need a Large Bailout
- Transnet Provides Reassurances to Maintain Capital
Expenditure Program
- Mining Indaba - Depressed Industry
- Safe Haven Gold Sparkles as Bourses Keep Sinking
- Research Commercialization Boost for Biotechnology
Planned
End Summary.


--------------
Retail Sales Growth Remains Negative
--------------


2. (U) South African retail trade sales dropped 4.4% in November and
declined by 0.1% year-on-year (y/y) in December, according to
Statistics South Africa. This was the eighth straight month of
negative growth by the retail sector. Total retail sales growth was
9.6% in 2006, and 5.1% in 2007, but was -2.2% in 2008, which was the
first annual decrease in nine years. Consumers are under severe
strain following a cumulative 500 basis points in interest rate
hikes between June 2006 and June 2008 to tame inflation. Analysts
now expect a series of rate cuts this year to help boost growth as
inflation slows. The latest data suggests that retailers enjoyed a
better-than-expected Christmas shopping period, possibly boosted by
the 50 basis point rate cut in December, which kicked off the
loosening cycle. (Business Day, February 18, 2009)

--------------
Rand Vulnerable to Higher Risk Aversion
--------------


3. (U) Merrill Lynch expects the rand to weaken "markedly"
throughout the year to reach R10.95 against the dollar in September.
"At about 7% of GDP, the current account deficit remains
uncomfortably large, especially given the heavy reliance on private
portfolio flows for its financing," warned Merrill Lynch in a
research note. Economic growth is expected to slow, which may
dampen investor confidence. The South African Reserve Bank's move
toward more aggressive monetary easing will likely fuel more
currency weakness, predicted the researchers. The 2009-10 budget
presents a larger-than expected fiscal deficit, which may raise
concerns about financing requirements. The researchers also expect
a risk of increasing political uncertainty ahead of the April
presidential election, which may negatively affect investor
confidence. (Business Day, February 18, 2009)

--------------
Special Duty on Textiles Considered
--------------


4. (U) A special duty on clothing and textiles might be imposed if a
rescue package proposed by the National Economic Development and
Labour Council (NEDLAC) is implemented. Department of Trade and
Industry (DTI) Director General Tsediso Matona commented, "The issue
of a general review of protection has emerged. Among those measures
... would be trade policy measures." There was no tool in the World
Trade Organization that would allow for acting against cheap imports
per se, he added, but remarked that it was a country's trade policy
Qper se, he added, but remarked that it was a country's trade policy
prerogative to review its tariffs. The depreciated rand exchange
rate was already providing a measure of protection for local
manufacturers by making imports more expensive, noted Matona, and he
did not believe that "people would support tariff increases." South
Africa's tariffs on clothing and textile imports are already among
the highest in the world, averaging more than 30%. (Business Day,
February 18, 2009)

-------------- ---
SAA Tells Government It Will Need a Large Bailout
-------------- ---


PRETORIA 00000323 002.2 OF 003



5. (U) State-owned South African Airways (SAA) warned Parliament
that it could not keep going without a big capital injection. SAA
is expected to post a significant loss for the financial year ending
March 2009 for the third year running because of interest payments
well in excess of R300 million ($30 million) and losses from hedging
against volatile fuel prices. Higher fuel costs last year and
falling passenger numbers contributed to its troubles. SAA Chief
Financial Officer Kaushik Patel announced that the airline's
precarious financial situation was likely to deteriorate even
further as it was undercapitalized and burdened by debt. The global
economic meltdown would make the situation worse as passenger
volumes and revenue continue to slump. "The interest burden as a
whole is so big that it wipes out all operational profits," Patel
said. The Treasury turned down an SAA request for a R5.2 billion
($512 million) capital injection, which would have brought the
percentage of debt to equity down to 60%-70%. SAA received only
R1.6 billion ($158 million) in the 2009-10 budget. Patel would not
elaborate on SAA's estimated hedging loss, saying this would depend
on the fuel price on the last day of the financial year. Acting CEO
Chris Smyth emphasized that SAA was operationally sound and
profitable and reassessing its routes based on profitability. All
of its domestic routes were profitable, as were all international
routes last month, except for New York. Africa was still SAA's most
profitable market. Smyth conceded that the two recent drug
trafficking incidents involving SAA crew on flight to London had
caused "horrendous" damage to SAA's image. (Business Day, February
19, 2009)





--------------
Transnet Provides Reassurances to Maintain
Capital Expenditure Program
--------------


6. (U) State-owned freight and transport logistics group Transnet
reiterated that it would not scale back its capital expenditure
program. It was on track to spend R19 billion ($1.9 billion) during
its current financial year, Transnet announced, while its R80
billion ($8 billion),five-year capital expenditure program had not
been derailed by a rapid decline in demand and revenue. Transnet
acknowledged that the slowdown in global economic growth had
resulted in reduced volumes and confirmed that some capital projects
had been reprioritized, but insisted that "all key, priority and
strategically significant projects" were being continued and that
implementation was proceeding as planned. The decision to continue
with the program underscored its commitment to providing capacity in
its ports, rail, and pipeline divisions ahead of demand. Transnet
added that a further R19 billion ($1.9 billion) would be spent over
the next five years on the coal and iron-ore lines, which would
increase capacity on the coal lines (to 71 million tons a year) and
iron-ore lines (to 60 million tons a year). Transnet said it would
increase container capacity by 32% over five years. "The capacity
will meet the latest demand forecasts over the five-year period with
spare capacity to deal with any higher growth in volumes," Transnet
Qspare capacity to deal with any higher growth in volumes," Transnet
promised. Other major projects included Transnet Freight Rail's
projects to improve general freight business, a new multi-product
pipeline, and the widening and deepening of the entrance channel in
the Port of Durban. (Engineering News, February 18, 2009)

--------------
Mining Indaba - Depressed Industry
--------------


7. (U) Attendance at this year's Mining Indaba in Cape Town was down
one-fifth from the record boom-time attendance last year. One
delegate remarked, "There are some hopeful people here with mines
that never can be profitable, looking for financing that isn't
there." Conference Director Tim Wood told delegates that companies
with market values totaling $1.3 trillion last year were represented
this year at the Indaba and this year their value had plummeted to
$560 billion. Keynote speakers detailed the extent of weak global
growth, particularly in the U.S. and China, which had in turn
shriveled demand for basic commodities, with the exception of gold
which still drew investors seeking safe havens in turbulent times.
Others pointed out signs of a turn-around, particularly in China,
and the observation that the mining industry had seen and overcome

PRETORIA 00000323 003.2 OF 003


cyclical downturns many times before. Minister of Minerals and
Energy Buyelwa Sonjica called on mining companies to delay lay-offs,
and warned that there would be no extensions for the end-April
due-date for applications for new-order prospecting rights. Mining
consultancy Behre & Dikbeab recently ranked South Africa's
attractiveness for mining investment 19th out of 20 mining
countries. South Africa's low ranking was largely attributable to
uncertainties over security of mining rights. An investment banker
warned that sensitive black empowerment deals required under the
Mining Charter and the accompanying Minerals and Petroleum Resources
Development Act were in breach of debt covenants after company
earnings and share prices deteriorated. Minister of Finance Trevor
Manuel provided a life-line of sorts with his decision to delay by a
year the implementation of mining royalties, which would lessen
financial burdens on struggling mining companies. (Business Times,
Business Day, Engineering News, February 13-15, 2009)

--------------
Safe Haven Gold Sparkles as
Bourses Keep Sinking
--------------


8. (U) Gold surged to its highest level in seven months on February
17 as global equity markets continued falling, raising the metal's
appeal as a safe haven investment. The most recent surge appears to
be caused by buying by the Russian Central Bank. The spot price of
gold surged to $971.65 per ounce, its highest since last July when
it traded at $977.50/ ounce. In weakening rand terms, gold has hit
an all-time record high of R9,958/ounce, which has benefited South
African companies' earnings and share prices. Platinum has borne
the brunt of weakness in the U.S. car market, and is now less than
half of its March 2008 high of $2,300/oz, at $1,089/oz on February

17. Rough diamonds are projected to fall 50-60% because of the weak
U.S. market for discretionary luxury goods and structural problems
in the industry, but a diamond consultant told the Indaba the
long-term prospects for diamonds was good because there continues to
be a desire for diamonds and no great new mines had been
discovered." With respect to the exception of gold, Quantitative
Commodity Research said, "The very big uncertainties in the stock
market and economy are driving investors into gold and precious
metals. We are seeing the first attempt at reaching the $1,000 mark
- since gold reached $1,032.40/oz last March." The firmer gold
price led to a 7% rally in gold shares on the JSE. Stanlib
Economist Kevin Libbs remarked that although gold's contribution to
South African exports had shrunk - from 50% in the early 1980s to
10-12% today, the rise in gold price would be beneficial for South
Africa's current account deficit and could help gold companies avoid
retrenchments. (Business Day, February 18, 2009)

--------------
Research Commercialization Boost
for Biotechnology Planned
--------------



9. (U) The South African government along with academics, members of
the business community, and biotechnology practitioners met in
Pretoria to establish a Business Angel Network (BAN) for the
biotechnology sector. A French BAN manger who attended the meeting
Qbiotechnology sector. A French BAN manger who attended the meeting
described a BAN as a group of volunteers who identify potential
investors and match them to new companies and managers who need
money and skills. Dr. Steven Cornelius of the Gauteng Department of
Agriculture Conservation and Environment remarked that biotechnology
has the potential to boost the economy, but there is a serious lack
of capacity in South Africa to advance from research to
commercialization. Cornelius cited lack of access to finance as one
of the main challenges for the biotechnology industry. (Pretoria
News, February 12, 2009)