Cablegate: South Africa Economic News Weekly Newsletter May 4, 2007

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R 041144Z MAY 07





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1. (U) Summary. This is Volume 7, issue 18 of U.S. Embassy
Pretoria's South Africa Economic News weekly newsletter.

Topics of this week's newsletter are:
- Industrial Policy to Include Chemical Sector
- Manufacturing Down Due to Strong Rand
- Call Center Industry Booming
- Trade Deficit Widens Slightly
- Soweto Undergoing Gentrification
- SA Audit Warns of Spiraling Power Crisis
- New Regulator to Boost Port Efficiency

End Summary.

Industrial Policy to Include Chemical Sector

2. (U) As part of the Department of Trade and Industry's broader
industrial policy framework, the chemical sector is one of the
strategic sectors targeted for programs to drive growth and
stimulate job creation. It is estimated that the proposed strategy
will attract investment of up to 13 billion rand ($1.86 billion),
which translates into an estimated 3.3 billion rand ($471.4 million)
in foreign exchange earnings and creation of 5,000 skilled jobs by
2014. Currently, the industry provides 156 billion rand ($22.3
billion) in gross revenue, employs 177,000 people, accounts for 20%
of SA's total manufacturing sales, and constitutes 4.5% of gross
domestic product. The strategy is focused on growing downstream
subsectors, a reverse trend from the capital-intensive upstream
operations and producers that dominate the market. There will also
be a review of the sector's pricing practices. Import parity
pricing is the current common practice for pricing local basic
chemical products. The key programs outlined in the framework are
titanium beneficiation initiative, fluorochemical expansion, and
petroleum, petro-chemicals and a plastics hub initiative worth $2 -
$3 billion rand ($28.6 to $42.9 million) to be located at the Durban
International Airport. (Business Day, April 30)

Manufacturing Down Due to Strong Rand

3. (U) Manufacturing activity slowed for the first time in six
months as gains in the rand lowered exports, according to the
Investec purchasing managers index. A sharp fall in new sales
orders is considered the main factor in the slowdown. Despite this
slump, the sector remains buoyant and manufacturing is set to remain
as one of the main drivers of SA's economy. Economists noted that
while the rand is not as favorable as it was a few months ago, it is
not uncompetitive and the robust economic outlook remains intact.
(Business Day, May 3)

Call Center Industry Booming

4. (U) The call center industry in SA continues to experience
significant growth. Research by indicates that
approximately 65,000 people are employed in 535 call centers in SA.
DTI's research reveals that SA's call center industry in SA is
already comparable in size to most European countries, and with
government incentives, foreign investment promotions, grants, and
the recent reduction of Telkom's tariffs, the call center industry
is expected to create more than 100,000 jobs, directly and
indirectly, during the next five years. SA markets its industry as
providing excellent quality service at a great financial savings.
It is estimated that the cost of setting up a center in SA is 55%
less than the cost of setting up a center in the U.S. Current
challenges to the development of call centers are the lack of
sufficient skills and the need for training programs. (Business
Times, April 29)

Trade Deficit Widens Slightly

5. (U) According to the South African Revenue Service (SARS), the
trade deficit widened to 2.7 billion rand ($385.7 million) in March.
Exports were up 13.6% month-on-month in March to 42.5 billion rand
($6.1 billion) and imports increased 12.9% for a record high of 45.3
billion rand ($6.5 billion). The cumulative trade deficit for the
first three months of 2007 was 15 billion rand ($2.14 billion),
compared with 14.7 billion rand ($2.10 billion) for the same period

PRETORIA 00001577 002 OF 003

in 2006. The increase in imports from February to March was
attributed to high imports of machinery, mechanical appliances,
electrical equipment, mineral products and chemicals. This
countered the decrease in motor vehicle imports. Exports were up
due to increases in exports of semi-precious and precious stones and
metals. Vehicle exports also rose. Economists indicated that the
current account deficit is expected to narrow this year and
predicted that, while SA will continue to run a large trade deficit,
it may have reached its peak. (Business Day, May 2)

Soweto Undergoing Gentrification

6. (U) Soweto is experiencing an economic awakening and undergoing a
broad economic turnaround. The world-famous black township did not
have significant infrastructural development or private investment
for decades. In the past five years, however, the perception of
Soweto has changed as studies reveal that the living standard of
many blacks has moved up to "middle class". Sowetans are now
increasingly finding new economic opportunities in their own

7. (U) Some of these job prospects are government-led large
infrastructure projects, including construction of new roads and
transport nodes, and the multimillion rand stadium for the 2010
soccer World Cup. Light industrial development at the Soweto
Empowerment Zone, a focused area for new businesses, is also
contributing to the increase in economic activity. A visible sign
of the major upswing in Soweto is the dramatic growth in retail
space, in which shopping malls are being planned and built
throughout the township. SA's national retailers are rushing to
fill the newly created space in these shopping meccas. They are
pursuing 4 billion rand ($571 million) in spending power, which is a
reflection of the gentrification of Soweto. In addition to retail
space, other development projects include construction of lakeside
residential units, office space, extreme sports venues, and other
entertainment and recreational facilities. For example, in one
neighborhood, a 100 million rand ($14.3 million) development is
about to break ground. It will incorporate a shopping center, a
60-unit townhouse complex, and the new premises of the Soweto
Hospice. A four-star hotel is also due to open in October. In
addition to this retail- driven economic transformation, the
collective economic strategy also includes empowerment of existing
small business operators, local job creation, encouraging
manufacturing, and development of small and medium enterprises.

8. (U) Soweto's housing market is another indicator of the
increasing economic health of the township. Newly built house
prices increased on average 50% last year. Although the sale of
pre-owned property still lags, this figure is steadily rising.
Soweto is not the only township to undergo economic improvements; it
is just leading the way as other townships are beginning to build
retail outlets and malls to cash in on the new spending power among
the black middle class. (Financial Mail, April 27)

SA Audit Warns of Spiraling Power Crisis

9. (U) Fears of power cuts this winter, and a major blackout on
Johannesburg's East Rand since Monday, have heightened the public's
attention on SA's power crisis. To date, electricity supply
concerns have only centered on Eskom's failure to develop adequate
generating capacity to supply the growing demand, but this week's
release of The National Energy Regulator of SA's audit report also
highlights SA's neglected distribution system. It is a further
warning that more power blackouts can be expected.

10. (U) The report covers 11 large energy distributors and provides
a dismal picture of SA's electricity distribution infrastructure.
The audit, initiated after a spate of power outages in 2005, was
aimed at determining the state of readiness of various
municipalities in providing electricity. The audit assessed the
conditions of substations and the network, the effectiveness of
maintenance plans and execution, and the effectiveness of
refurbishment and expansion plans. The result: "a dearth of skilled
staff has resulted in the embrittlement of management resources and
loss of control over essential technical elements" and inadequate
investment and maintenance has led the systems of large municipal
undertakings and metros to falter. Small municipalities were
singled out as having some of the worst problems, with the report

PRETORIA 00001577 003 OF 003

intimating that some were on the edge of collapsing. According to
the report, the refurbishment backlog at the end of 2005 for
utilities was estimated at 431 million rand ($61.6 million). With
an average cost requirement to maintain present service levels at
420 million rand ($60 million), a total investment of 850 million
rand ($121.6 million) is needed to begin improvements to the system.
This would not, however, resolve the skills deficit, which is
expected to worsen with the increase in the average age of senior
staff. (Pretoria News and Business Day, May 3)

New Regulator to Boost Port Efficiency

11. (U) With the appointment of nine non-executive directors, the
independent National Ports Regulator (NPR) was officially set in
motion on May 2. The NPR was six years in the making and is aimed
at improving the efficiency of SA's commercial ports. The
implementation of the NPR also marks the end of the National Ports
Authority's (The Authority) role as regulator. The Authority can
now focus on maintaining and improving port infrastructure. The
NPR's tasks will include ensuring The Authority's activities are at
acceptable levels of service for port users, preventing abuse of its
monopoly power by The Authority, and maintaining impartiality and
equity in port services. The NPR will have the ability to probe
complaints against The Authority by port users and tenants, hear
appeals, and impose fines or five-year prison sentences for reckless
endangerment of the safety of navigation, persons or property in the
port. (Business Day, May 3)


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