South Africa Tourism Report Q2 2008

Tourism Overview The tourism sector looks set to record another favourable year in 2007, although growth in foreign arrivals slowed. Latest available data for the period January to November 2007 show that foreign tourist arrivals were up a strong 8.6% year-on-year (y-o-y) at over 8.2mn, from around 7.6mn in the corresponding period of the previous year. This follows buoyant growth in arrivals of 14% y-o-y to nearly 8.4mn in 2006. In the hospitality sector, the total number of tourist (foreign and domestic) room nights in all accommodation establishments was up a reasonable 3.7% y-o-y to over 4.8mn nights in Q307, after a 4.7% y-o-y increase in Q207. Occupancy rates in all accommodation establishments in Q307 also showed improvement, standing at an average of 49.5%, which was up just over 4% y-o-y. This improvement occurred outside the hotel sector however, with hotel occupancy rates declining to an average 61.7% in Q307, compared with 67% in the same period of the previous year. BMI now anticipates that hotel occupancy rates declined in 2007 to an average of just over 60%.

Source Markets In the first eleven months of 2007, tourist arrivals from African countries continued to show strong growth, up nearly 10% y-o-y. By contrast, the growth rate in arrivals from Europe was a modest 2.6% yo- y, with tourist arrivals from the UK - the main source market in Europe - up just 2.4% y-o-y to around 440,000. Furthermore, German arrivals declined 2.2% y-o-y to some 230,000. Arrivals from France, meanwhile, were up a relatively strong 10% y-o-y to about 106,000. After good growth rates in 2006, tourist arrivals from North America were up an equally strong 10% y-o-y, while arrivals from Asia increased an even more favourable 14% y-o-y.

Forecast Scenario Despite robust real GDP growth in Q307, we believe that the economy will slow to 4.7% in 2008 from an estimated 5.1% in 2007, mainly as a result of monetary tightening and weakening external demand.

However, we maintain our core view that South Africa's macroeconomic fundamentals and growth prospects will remain robust over our five-year forecast period.

Despite a slowdown in growth in foreign tourist arrivals in 2007, BMI foresees steady growth in arrivals in both 2008 and 2009, with average growth of near 7% per year in the period 2007 to 2009. This is supported, in part, by the forecast fall in the value of the South African rand against the euro and US dollar, attracting high-spending European and North American visitors. In our view, aside from a large current account deficit, monetary easing from H208 onwards will be the main driver of currency depreciation in the years ahead (BMI forecasts an average exchange rate of ZAR7.65/US$ in 2009, declining to ZAR7.95/US$ in 2011). In 2010, we expect growth in tourist arrivals and tourism receipts to pick up sharply, as the country hosts the FIFA World Cup. In the meantime, BMI will also monitor the recurrent power crisis in the country, which remains a potentially serious issue for tourism (both international and domestic).

South African Airways Interim results for the six months ending September 2007 show South African Airways (SAA), the national airline, recorded net profit before tax and restructuring charges of ZAR136mn from airline operations. This represents a significant improvement on the corresponding period of the previous year, when the company showed a sizeable net loss of ZAR650mn. The positive interim financial performance shows that the airline's restructuring programme - implemented from mid-2007 - is starting to pay off, with the growth in operating costs beginning to slow and revenue showing good growth.