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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)