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Cablegate: South Africa Economic News Weekly Newsletter February 9,

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TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
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SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER FEBRUARY 9,
2007 ISSUE


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1. (U) Summary. This is Volume 7, issue 09 of U.S. Embassy
Pretoria's South Africa Economic News weekly newsletter.

Topics of this week's newsletter are:
- Ambassador Opens BEE Conference
- Pace of Growth Jumps to Fastest in Two Years
- Weather Affects Expected Corn Harvest
- South Africa's U.S. Exports Up 28%
- Super Tax Proposed for Resources Sector
- Eskom Expects to Make Nuclear Power Plant Decision in March
End Summary.


Ambassador Opens BEE Conference
-------------------------------
2. (U) Ambassador Eric Bost opened an American Chamber of Conference
of South Africa workshop on Black Economic Empowerment on March 1.
Over 200 companies and chambers attended the event. The Ambassador
stressed the fact that American companies already understand the
need for diversity and responsible corporate behavior, and noted
that AmCham members employ 50,000 workers in South Africa and spend
almost $90 million per year on corporate social investment. The
Ambassador stressed that American companies interested in long-term
success in South Africa must embrace BEE: "BEE not only gives black
South Africans opportunities," he said, "but also creates new
opportunities and markets for American companies." He cautioned
that BEE must remain flexible and sensitive to the practical needs
of companies. The Ambassador closed his remarks by stressing that
President Bush regards expanded bilateral business ties as a key
part of American policy in South Africa.
3. (U) Department of Trade and Industry Deputy Director General
Lionel October delivered the keynote address. October noted that
the old debate about whether BEE would hamper economic growth has
been overtaken by events: South Africa's economy, he stressed, has
grown at unprecedented rates at exactly the moment when BEE was
being formulated and implemented. "There is no contradiction
between BEE and growth," he told the business audience. October
also made the same point about Bee and FDI. October said that the
underlying principle of the new BEE Codes is to broaden the base of
BEE beneficiaries to include workers, small businesses and
communities. "BEE is not just about putting equity in black hands,"
he said. He defended the decision to impose BEE rules on companies,
claiming it would have been impossible to leave black empowerment to
the market. He stressed, however, that BEE must be realistic and
financially sustainable.

Pace of Growth Jumps to Fastest in Two Years
--------------------------------------------

4. (U) Economic growth accelerated to its fastest pace in more than
two years in the fourth quarter of last year, far above market
expectation. Gross Domestic Product (GDP) increased by 5.6% on a
seasonally adjusted and annualized rate in the fourth quarter of
2006, up from the third quarter's revised growth of 4.5%. A
Bloomberg survey of economists had forecast growth of 4.8% for the
fourth quarter. Growth in the last three months of 2006 was the
fastest since the third quarter of 2004, when it was at 7.2%. The
main contributors to higher growth in the fourth quarter were the
manufacturing sector, which contributed 1.4 percentage points to
growth, and the finance, real estate and business services sector,
which added one percentage point. These two sectors are the largest
and second-largest sectors in the economy respectively, and together
account for about 36% of GDP. The agricultural sector contracted by
8.4% as a result of low harvests in the fourth quarter. Continued
contraction in the agricultural sector remains a drag on future
growth.

5. (U) For 2006 as a whole, the economy grew at 5%, almost as high
as 2005's rate of 5.1%. Growth is expected to slow down in 2007 as
last year's interest rate hikes begin to affect consumer demand and
the agricultural sector contraction, but increased investment by
government, parastatals and the private sector should offset the
slowdown to some extent. Overall, growth prospects for the economy
remain favorable, and there are encouraging signs that the sources
of growth are becoming more balanced. Analysts pointed out that the
healthy rise in mining and manufacturing production in the final
quarter of last year suggests that the weaker rand is doing good
work in stimulating supply-side activity, while higher interest
rates are having a modest dampening impact on consumer demand.

PRETORIA 00000771 002.2 OF 003


Analysts noted that, assuming that planned infrastructure spending
takes place and benefit the broader economy, SA is on track to reach
the government's 6% GDP growth objective by 2010. (Business Day,
February 28, 2007)

Weather Affects Expected Corn Harvest
-------------------------------------

6. (U) South Africa's commercial corn farmers planted about 2.6
million hectares of corn in 2006, which under normal conditions
would be expected to yield at least 9.75 million tons when harvested
by mid-2007. Although the rainfall season started late, November
and December rainfall was good. Since January, rainfall has dropped
dramatically while temperatures have increased. The prolonged hot
and dry spell led to an official forecast on February 27 of 7.75
million tons, a drop of about 2 million tons from initial estimates,
implying a loss to farmers of about R3.5 billion ($500 million) at
current high prices. The 7.75-million-ton estimate assumes normal
weather for the rest of the season and could certainly decline if
the drought continues and time for crop recovery runs out. The
modestly good news is that a 7.75 million ton crop is still a 17%
increase on the 6.6 million tons produced in the previous season
when farmers cut back the area planted in an effort to balance
supply and demand. South Africans normally consume about 8 million
tons of corn for human and animal feed use, so the current crop
estimate would roughly satisfy domestic food and feed demand.
Imports of yellow corn from Argentina are common, especially for
feed use. (Foreign Agricultural Service, February 27, 2007)

South Africa's U.S. Exports Up 28%
----------------------------------

7. (U) U.S. Customs has just released 2006 trade data. South
African exporters to the U.S. had a banner year, with total exports
up 27.9% (in contrast to 10.9% total growth in U.S. imports). More
important than the headline number, however, is the fact that
processed/manufactured goods generally beat the trend: autos up
70.3%; iron and steel up 41.4%; and, furniture up 43.6%. To
demonstrate the trend toward increasing value-added manufacturing in
South Africa, exports of paper increased 594% while exports of wood
pulp declined by 26.1%. In the sensitive area of textiles, South
African exports declined 1.9%. U.S. exports to South Africa
increased by 14.6%; at almost the same level as the U.S. worldwide
export increase of 14.5%. U.S. sales of commodity products used in
general infrastructure are growing the fastest: iron and steel, up
213%; cement, up 384%; and fertilizer, up 474.5%. U.S. exports of
machinery, electrical machinery and aircraft were also up strongly
at 14.2%, 18.8% and 27.0%, respectively. The only poorly performing
categories of U.S. exports were autos, down 16%; wood, down 9%; and
cereals, down 65%. The bilateral trade imbalance between the United
States and South Africa increased by 54.8%, as South Africa's trade
surplus increased to $3.1 billion. South Africa's bilateral trade
surplus with the U.S. equals about 1.1% of South Africa's GDP and it
helps to balance out South Africa's large multilateral trade
deficit.

Super Tax Proposed for Resources Sector
---------------------------------------

8. (U) South Africa's two synthetic fuel producers, privately-owned
Sasol (coal-to-liquids) and state-owned PetroSA (gas-to-liquids),
have been under government and public scrutiny ever since the rapid
rise in crude oil prices began to be felt in the economy and
peoples' pockets. Both Sasol and PetroSA were built with public
funds, and, although Sasol was privatized in 1979, it enjoyed the
protection of the SAG against low crude prices until the late 1990s.
In July 2006, when crude prices were well above $70 per barrel,
both companies enjoyed the benefits of high international oil prices
while using South Africa's relatively cheap coal, gas and
electricity inputs. The companies made huge profits and few
material benefits were passed on to consumers. At that point, the
Minister of Finance proposed an investigation into windfall taxes on
'excessive' profits earned by the synfuels industry and appointed a
Task Team to undertake such an investigation. The Task Team report
produced on February 23 concluded that a windfall/super tax could be
applied to both the synthetic fuel and the minerals industry. The
report suggests that such a tax could kick in when crude prices
exceeded about $45 to $55 per barrel and that, similarly, a price
level could be set for each mineral commodity that would trigger a

PRETORIA 00000771 003.2 OF 003


progressively larger tax take. The report also recommended
credits/tax breaks for new investment and for prices below a set
level (a floor price below which subsidies would apply). The
Minister has said that the synfuel industry will be consulted before
a decision is made. The key will be to apply a windfall
tax/investment credit that will not discourage the industry from
investing in badly needed additional synfuel capacity in South
Africa.

Eskom Expects to Make Nuclear Power Plant Decision in March
--------------------------------------------- --------

9. (U) South African parastatal power utility Eskom is expected to
announce plans for construction of a second nuclear power station
following its March 2007 board meeting. The most likely location is
adjacent to the country's sole commercial reactor in Koeberg near
Cape Town. Eskom is believed to have already chosen a Pressurized
Water Reactor (PWR) design which narrows the field of potential
bidders. Westinghouse/Toshiba and French parastatal Areva are
expected to be the main contenders. Consortiums from Russia and
Korea have also expressed interest in the project. The selection
process is expected to take another year with an award to be made in
March 2008. Following the board meeting, Eskom may also announce
plans for construction of smaller Pebble Bed Modular Reactors as
well as plans for additional coal-generation plants. The country
has been suffering from rolling blackouts and additional generation
capacity is desperately needed. (Engineering News, February 16,
2007)

BOST

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