VZCZCXRO5301
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #1343/01 1831535
ZNR UUUUU ZZH
R 021535Z JUL 09
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 8970
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHJO/AMCONSUL JOHANNESBURG 9338
RUEHTN/AMCONSUL CAPE TOWN 6970
RUEHDU/AMCONSUL DURBAN 1086

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)