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Cablegate: South Africa Economic News Weekly Newsletter March 9, 2007

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DE RUEHSA #0886/01 0681431
ZNR UUUUU ZZH
R 091431Z MAR 07
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 8653
RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHJO/AMCONSUL JOHANNESBURG 6344
RUEHTN/AMCONSUL CAPE TOWN 4053
RUEHDU/AMCONSUL DURBAN 8657

UNCLAS SECTION 01 OF 03 PRETORIA 000886

SIPDIS

DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR OAISA/RALYEA/CUSHMAN
USTR FOR COLEMAN

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 MARCH 9, 2007
ISSUE


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1. (U) Summary. This is Volume 7, issue 10 of U.S. Embassy
Pretoria's South Africa Economic News weekly newsletter.

Topics of this week's newsletter are:
- Net Reserves Increase
- Investment Promotion Delegation to the U.S.
- "Affirmative Action Won't be Scrapped
- Trade Deficit Bad News for Current Account
- SA Receives Low Tourism Ranking
- South Africa Gold Production Down
- Drought Affects Corn Harvest
- WTO Complaint Has Consequences for MIDP
- Fidentia Top Officers Arrested
End Summary.

Net Reserves Increase
---------------------
2. (U) According to data released by the South African Reserve Bank
(SARB), Net Gold and Foreign Exchange Reserves increased from $23.3
billion in January to $23.7 billion in February. Analysts said the
increase reflected the central bank's continued efforts to improve
South Africa's financial position by gradually lifting reserves
without overly impacting the foreign exchange market. The rand
remained relatively firm in February, edging towards R7 to the
dollar, only a slight change from its level at the end of January.
SARB brought the long-standing negative position in reserves into
balance early in 2004 with the elimination of its loss-making
forward foreign exchange book, historically the Achilles' heel of
the currency. Since then, SARB has gradually increased net
reserves, although the total still lags behind comparable emerging
markets. (Business Day, March 7, 2007)

Investment Promotion Delegation to the U.S
------------------------------------------

3. (U) The Department of Trade and Industry's (DTI) Minister Mandisi
Mpahlwa will lead an investment promotion delegation to the U.S. in
two weeks. The delegation will visit New York, Chicago, and Detroit
to promote investments in the information technology, biotechnology,
automotive and financial services sectors. These sectors have been
targeted by DTI as most likely to attract foreign investors.
According to DTI Chief Director of International Trade Iqbal Sharma,
the DTI hopes to build on already existing U.S. investments as well
as highlighting new opportunities. (Business Day, March 7, 2007)

"Affirmative Action Won't be Scrapped
-------------------------------------

4. (U) Deputy President Phumzile Mlambo-Ngcuka said that as long as
imbalances of the past still persist in South Africa, the
government's affirmative action policy would not be scrapped.
Mlambo-Ngcuka replied to a question by a Member of Parliament in the
National Council of Provinces who had asked her if the government
had any intentions to do away with the policy. Mlambo-Ngcuka said
affirmative action was a corrective measure that could only be
disbanded once its objectives had been met. She said that as long
as the majority of the previously disadvantaged people were still on
the margins of the economy and the majority of top managers were
still white, affirmative action policy objectives had not been
achieved and therefore could not be disbanded. Mlambo-Ngcuka was
speaking in the wake of a raging debate sparked by African National
Congress Western Cape MEC Marius Fransman, who called for the
suspension of the affirmative action policy, in order to lure back
skilled white South Africans who had left the country. His call
received strong support from opposition parties, with the Democratic
Alliance saying such a move would go a long way to addressing the
country's skills shortage problem. (Fin 24, March 6, 2007)

Trade Deficit Bad News for Current Account
------------------------------------------

5. (U) According to South African Revenue Service (SARS) data, South
Africa recorded a trade deficit of R11.94 billion ($1.66 billion) in
January after posting a surplus of R388 million ($54 million) in
December. Compared with the previous month, exports fell by 16.7%
while imports increased by a much larger than expected 17.2%.
Market analysts consider the trade deficit as unhealthy for the
current account, which is already in bad shape. Although South
Africa's current account deficit has been fully financed by capital

PRETORIA 00000886 002.2 OF 003


inflows in recent years - a high proportion of these funds are
portfolio investment - it has left the country vulnerable to the
ebbs and flows of international investment and emerging market
sentiment. The current account deficit and its impact on the rand
and inflation remains one of the key concerns of the Reserve Bank.
(Fin 24, March 1, 2007)

SA Receives Low Tourism Ranking
-------------------------------

6. (U) The World Economic Forum's (WEF's) Travel and Tourism
Competitive Index for 2007 ranked South Africa 62nd out of 124
countries. The index measured factors which make investment in the
tourism industry attractive. These factors included environmental
policy, safety and security, health and hygiene, air and ground
infrastructure, and information and telecommunication technology.
Although South Africa was rated high on most factors, the country's
overall drop in ranking is attributed to its high risk in the safety
and security, and health and hygiene factors. According to the WEF,
the high rate of violent crime, lack of adequate sanitation
facilities, and the low density of medical doctors and health
facilities in some areas are the greatest concerns for potential
tourists and investors. Meanwhile, the Executive Director of the
South African Tourism Services Association (SATSA) views South
Africa's low ranking as a harsh judgment that may discourage people
from visiting the country. A German-born local hotelier said he
could understand the concern about the crime rate, but argued that
he saw no problem in health and hygiene for people who planned to
invest in the tourism industry in South Africa. South African
Tourism CEO Moeketsi Mosola conceded that South Africa had some
challenges and that they are working to address them. (Business Day
and Business Report, March 2, 2007)

South Africa Gold Production Down
---------------------------------

7. (U) There has been a steady decline in South African gold output
since 1970, when gold production went above 1,000 tons. This
decline culminated in 2006 when only 275 tons were produced.
According to the Chamber of Mines, total production declined 7.5% in
2006 and this is the lowest level of output since 1922 when major
strike action reduced output to 218 tons. The lower output was
generally expected as miners adapted to the higher rand gold price
and took the opportunity to mine lower grade ore at a profit, thus
extending their mine lives. The average grade in 2006 was 14% lower
than the 2005 level. On the positive side, buoyed by the record
higher rand gold price during 2006, capital expenditure on gold
mines recovered to just under R6 billion ($850 million). There is a
possibility that one of the other major gold producing countries
such as Australia, the United States or China may have taken over as
the world's leading gold supplier in 2006, a ranking that South
Africa has enjoyed for more than 100 years. Australian gold output
in 2005 was 263 tons, the U.S. 262 tons, and China 224 tons.

Drought Affects Corn Harvest
----------------------------

8. (U) Hot and dry weather has continued across the corn-producing
areas of South Africa and Zimbabwe. FAS/Pretoria now estimates that
South Africa's commercial corn farmers will harvest 6.75 million
tons this year. This is down from the initial estimate of 9.75
million tons. The decline in corn and other grain harvests will
cause the agricultural sector to contract so much that it could
reduce the country's overall GDP growth by as much as 0.5% in 2007.
High corn prices will also have an impact on corn meal, beef and
poultry prices, putting pressure on inflation and increasing the
cost of living for the poor, the poorest of whom spend as much as
half of their income on food. Imports of up to 1.5 million tons of
yellow corn, likely from Argentina, will be required.

WTO Complaint Has Consequences for MIDP
---------------------------------------

9. (U) Mexico's recent complaint brought before the WTO against
China may have ramifications in South Africa. The complaint alleges
that China's incentive program for local manufacturers to boost the
use of local content in domestic production is incompatible with WTO
rules as it discriminates against foreign products beyond tariff
concessions. China's program requires enterprises to meet certain

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export performance criteria, which Mexico contends is the same as an
illegal subsidy. South Africa has focused on expanding its motor
industry through a similar incentive program, the Motor Industry
Development Plan (MIDP). This program also includes export
criteria, which would fall into the same illegal category as China's
program should Mexico prevail. The Department of Trade and Industry
is currently revising the MIDP to avoid these potential violations
of WTO regulations. (Business Day, March 7, 2007 and Embassy
contacts)

Fidentia Top Officers Arrested
------------------------------

10. (U) Police have arrested top officers of Fidentia, a Cape
Town-based asset management firm that was placed into curatorship
(receivership) a month ago. Regulators took Fidentia to court when
they discovered that Fidentia's cash resources had dwindled to
almost nothing and that more than R400 million ($55 million) of $1.6
billion ($220 million) being managed by the firm could not be
accounted for. The scandal has generated a wave of publicity, as
Fidentia's largest client was the Living Hands Trust, which invested
the funds of widows and orphans of mineworkers. Some Fidentia
officers were trustees of Living Hands, suggesting conflicts of
interest. The collapse of Fidentia has generated calls for more
power to be vested in the Financial Services Board. (Business Day,
March 8 and 9, 2007)

BOST

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