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Cablegate: South Africa Economic News Weekly Newsletter June 15, 2007

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TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
PGOV, SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER JUNE 15, 2007
ISSUE

1. (U) Summary. This is Volume 7, issue 24 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Zoellick Urges Africa "To Catch The Wave"
- Planed Duty Cuts On Infrastructure Projects
- Manuel Stresses Need For Exports
- General Electric To Construct New Plant
- Reserves Increase
- Manufacturing Could Brake GDP
- Hike Threatens SA's Cheap-Power Edge
End Summary.

-----------------------------------------
Zoellick Urges Africa "To Catch The Wave"
-----------------------------------------

2. (U) World Bank President-nominee Robert Zoellick told reporters
that he is impressed by a new generation of African leaders who are
taking responsibility for the economic development of their
countries. Zoellick spoke to reporters in Pretoria at the end of a
tour of Africa that took him to Ghana, Ethiopia, and South Africa.
No one-size-fits-all approach could be adopted for Africa, Zoellick
said, emphasizing the vast potential of the continent. "There are
some strong opportunities here," he said. "You want to catch the
wave and move forward with some of the high-quality economic leaders
in Africa. I hope the World Bank can develop stronger partnerships
with African countries to assist them in reaching stronger growth."
Zoellick also cited the need for African countries to address
infrastructure constraints and to make progress toward regional
integration. (Business Day, June 11, 2007)

-------------------------------------------
Planed Duty Cuts On Infrastructure Projects
-------------------------------------------

3. (U) The South African Government is considering the reduction of
import duties on products needed for its four-year R400 billion ($75
billion) infrastructure development program. Last month the SAG's
International Trade Administration Commission (ITAC) announced the
review of two chapters of the tariff schedule, which include a wide
array of electrical goods and mechanical appliances, including
nuclear reactors and boilers. ITAC said that the review was a
"proactive initiative" to support the infrastructure program and
would determine whether current duties place an unnecessary burden
on importers, especially in the case of items that are not
manufactured domestically. Trade specialists have warned that
unilateral cuts could undermine South Africa's bargaining power in
international trade negotiations and strain the country's
relationships with other members of the Southern African Customs
Union, which rely on tariffs collected by South Africa. (Business
Day June 11, 2007)

--------------------------------
Manuel Stresses Need For Exports
--------------------------------

4. (U) Finance Minister Trevor Manuel played down the challenges
faced by South Africa's rapidly expanding economy, saying export
performance must improve for the country to sustain a faster pace of
growth. Manuel told delegates to an International Monetary
Conference meeting in Cape Town that South Africa's economy had
clocked up annual growth of about 5% over each of the past three
years, its fastest for a quarter of a century and the longest period
of expansion in four decades. But the blistering pace has led to
supply constraints, particularly in construction and energy.
However, "For SA to sustainable grow faster, we must improve our
export performance, especially in non-commodity sectors," Manuel
said. Export volumes rose 6% last year mainly due to buoyant global
demand and a weaker rand. Manuel also repeated the government's
view that the widening deficit on the current account, seen as the
most vulnerable spot in its economy, was not alarming due to strong
capital inflows, which amounted to R144 billion ($20.6) last year.
"Increased confidence in our economy means that we do not face a
binding constraint on the balance of payments," he said. However,
economists said the problem with this position is that the inflows,
which mainly reflect equity investment, could subside for reasons
beyond South Africa's control, like a sudden bout of global risk
aversion or a sharp fall in commodity prices. That would knock the
rand weaker and add to mounting inflation pressures, prompting

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interest rate hikes weighty enough to slow growth. (Business Day,
June 6, 2007)

---------------------------------------
General Electric To Construct New Plant
---------------------------------------

5. (U) GE Water & Process Technologies, a unit of the U.S. Company
General Electric, is to design and construct a reverse osmosis
seawater desalination plant, which will produce about 70,000 cubic
meters of fresh water and 1,800 tons of 99.9% pure salt per day
(630,000 tons annually). In a first for South Africa, the GE plant
will recover ultra-pure salt from the concentrated brine stream for
the production of chlorine, caustic soda, and hydrochloric acid at a
new refinery to be developed by Uhde South Africa. The $220 million
GE project is part of a larger investment totaling $800 million,
which will see a new chlorine refinery in the Coega Industrial
Development Zone, which lies about 25 kilometers west of Port
Elizabeth. The refinery will be owned and operated by, Strait
Chemicals, a unit of Singapore-based Chemical Industries Far East
Limited, and will produce 610 tons of chlorine gas and 660 tons of
caustic soda per day to meet the growing global demand for
chlor-alkali and its derivatives. GE's seawater desalination plant
will improve the overall economics of the chlorine refinery and
ensure a reliable and locally available supply of high grade salt.
Construction of the refinery is expected to take between 18 and 24
months and should be commissioned towards the end of 2009. Chlorine
gas is used in making PVC, plastics, pesticides, footwear,
disinfectants, water treatment and paint pigments, while caustic
soda is used in parachutes, pen tips, telephones and
pharmaceuticals.

-----------------
Reserves Increase
-----------------

6. (U) According to South African Reserve Bank data, net gold and
foreign exchange reserves increased from $24.59 billion at the end
of April to $25.48 billion at the end of May. Gross reserves
increased from $27.02 billion in April to $27.85billion in May. The
SARB attributed the increase in the reserves to "a combination of
valuation adjustments and foreign exchange operations conducted by
the SARB for its own account". Economists expect the build-up of
reserves to continue at a steady pace, although the recent weaker
rand could have a somewhat negative impact on the rate of reserve
accumulation. Nonetheless, economists expect the SARB to continue
to build up reserves, with a $30 billion target in sight.
International credit rating agencies have always been concerned by
South Africa's relatively low foreign reserves if compared with
other emerging markets. (Fin24, June 7, 2007)

-----------------------------
Manufacturing Could Brake GDP

-----------------------

7. (U) According to Statistics South Africa (StatsSA), manufacturing
output growth in volume terms slowed from an upwardly revised 5.5%
in March to 3.8% in April, suggesting the key sector could put a
brake on economic growth this year. Analysts said the number did
not bode well for the country's economic growth outlook for the
year. Expansion in the sector slowed from 8.3% growth in the fourth
quarter of 2006 to 4.7% in the first quarter of 2007. This has been
blamed on slower global growth, which reduces demand for South
African exports. The slower growth in manufacturing output was in
line with a decline in the Purchasing Managers' Index (PMI), which
points to trends in manufacturing ahead of official data, from 60.5
points in March to 57.9 points in April, indicating slowing
underlying growth. Manufacturing is the second-biggest sector in
Africa's biggest economy after financial services, accounting for
nearly 17% of gross domestic product. (Fin 24, June 7, 2007)

------------------------------------
Hike Threatens SA's Cheap-Power Edge
------------------------------------

8. (U) According to a study by New Jersey-based cost management
consulting firm NUS Consulting Group, electricity prices in South
Africa remain the lowest in the world despite the fact that power
utility Eskom has a de facto monopoly in the market. However, the

PRETORIA 00002155 003 OF 003


report warned that Eskom's planned 18% tariff increase could
"dislodge" South Africa from its enviable position. Eskom has
requested higher tariffs to help finance its R150 billion ($21.4
billion) capital investment program over the next five years. Eskom
plans to build new power stations, increase the capacity of
transmission lines, refurbish distribution infrastructure and bring
back to service power stations that were shut down in the early
1980s. The NUS research found that Eskom had outperformed 13 other
deregulated markets from both an infrastructural planning and
pricing perspective, thanks to a vigilant and strong industry
watchdog, the National Energy Regulator of SA (NERSA). "One of the
interesting phenomena emerging from our surveys is that a
well-regulated and well-managed electricity supply monopoly, treated
as a matter of strategic economic importance, can outperform
deregulated markets from both an infrastructural planning and
pricing perspective," said Stephan Dolk, NUS General Manager in
South Africa. He said South African electricity prices, at
$0.04/kWh, were one-sixth of those in Denmark, the most expensive
country in the world for electricity. NUS predicted that South
African electricity prices would rise well above the inflation rate
in the next 12 months, and could escalate sharply in the next few
years should Eskom get the 18% tariff increase it has applied for
from NERSA. (Business Day, June 6, 2007)

BOST

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