Mon séjour en Afrique du Sud (Cape Town)

On the political front, the early removal of South African President Thabo Mbeki has significantly raisedthe country's political risk profile, with potentially negative implications for longer-term growth andexternal credit ratings. In our view, Thabo Mbeki's early resignation on September 20 2008 willsignificantly accelerate the transformation of South Africa's political landscape over the coming year,with rising short- and longer-term risks to political stability and policy continuity lying ahead. Althoughthe recent acquittal of Jacob Zuma on corruption charges decreased the risk of violent protests andtherefore merited an increase in our short-term political risk ratings, Mbeki's ousting has elevated thethreat of snap elections and even a break-up of the African National Congress (ANC) into two parties.Consequently, we have revised our short-term political risk ratings from 67.5 to 61.3.

It is noteworthy that, due to high borrowing costs and weaker external demand, we forecast that real GDPgrowth will remain subdued during the remainder of 2008 and the first two quarters of 2009. However,expected monetary easing from Q209 onwards, an improvement in external conditions and risingeconomic activity in the run-up to the 2010 FIFA World Cup are likely to lift economic growth againbeyond the 5% mark in 2010. In our view, South Africa's frail electricity sector will remain the main riskto economic expansion over the longer term. As a proportion of GDP and total government expenditure,defence spending in South Africa is miniscule.

South Africa's defence industry has undergone significant adjustments with the lifting of the armsembargos which has led to increased competition from foreign companies. With the South AfricanNational Defence Force (SANDF) no longer a captive customer of the sector, companies have had to layoff large sections of their workforce, leading to dwindling numbers. Recent procurement packages -instituted since about the middle of the present decade - may be the first step in reversing this trend.

However, arms imports should increase substantially with the delivery of the major weapons platformsrecently ordered by the government, particularly with the recent normalisation of relations between theUS and South Africa. The future of the South African defence industry depends on its successful breakinginto international markets. Joint ventures (JVs) will aid the country in gaining a technological lead in keyareas. Currently, the biggest single long-term problem within the defence industry is the lack of researchand development (R&D), funding and policy. Arms exports are proving a more vital area of sales forSouth African defence companies, and should remain the main driver of any growth in the industry.Encouraging figures from key defence companies seem to suggest that the defence industry is growingand making inroads into international export markets.

A quick gloss of the industry leaders reveals a handful of significant players. Formerly the manufacturingdivision of Armscor, South Africa's arms procurement entity Denel was established in 1992. Inheritingmuch of Armscor's production and research facilities, Denel was for a time the largest defence companyin South Africa, employing over 10,500 people - a figure that has dropped to under 8,000. Othercompanies with a major presence in the defence industry include BAE Systems Land Systems SouthAfrica, African Defence Systems (ADS), Grintek Defence & Technologies, Reutech and civil andmilitary aviation industry specialist Aerosud.