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)