Cablegate: South Africa Economic News Weekly Newsletter

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1. (U) Summary. This is Volume 8, issue 7 of U.S.
Embassy Pretoria's South Africa Economic News Weekly

Topics of this week's newsletter are:
- Industrial Policy to Receive Infusion of Funds
- SA to Fast-Track Investment Process
- Mbeki Outlines ICT Priorities
- SARB Emphasizes Growth over Inflation
- South Africa's Rand Depreciates
- Growth Target Revised
- Analysts Debate Need for Tax-relief
- Retail Sales at Six-Year Low
- Credit Rating Remains Stable
- PetroSA: Crude, But Effective
- Lanseria Airport Expands
- Cell C Recovery Campaign Pays Off
End Summary.

--------------------------------------------- -
Industrial Policy to Receive Infusion of Funds
--------------------------------------------- -

2. (U) President Mbeki said in his February 8 State of the
Nation address that the government's industrial policy will
be reinforced with an injection of state funds amounting to
R7.3 billion ($1 billion) over the next three years. R5
billion ($714 million) will be earmarked for tax incentives
and the remainder will be dedicated to other forms of
initiatives. Further details on the funding package are to
be released as part of Finance Minister Trevor Manuel's
budget speech for 2008-2009 on February 20. The industrial
policy identifies several high priority sectors for
development, including automotive, chemical and
pharmaceuticals, capital equipment and mining
beneficiation, and forestry and pulp. Incentives will also
be provided for other sectors including tourism, business
process outsourcing and the development of arts and craft
hubs, according to Department of Trade and Industry's
Acting Deputy Director-General Sipho Zikode. (Business
Day, February 11, 2008).

SA to Fast-Track Investment Process

3. (U) President Mbeki also said that South Africa would
fast track investment application processes and speed up
infrastructure provision to support continued economic
growth. He unveiled plans to set up a call center to help
prospective investors track applications, such as
environmental-impact assessments. This call center would
also aim to speed up the application process for land
acquisition and infrastructure. Mbeki admitted that the
"tardiness" with which government departments dealt with
these applications could "make or break investor
decisions". He continued that the government was
"urgently" setting up the call center, which would also
help government departments track progress. (Engineering
News, February 8, 2008)

Mbeki Outlines ICT Priorities

4. (U) President Mbeki also pointed to the information and
communication technology (ICT) infrastructure as a
"critical priority, both as a facilitator and as a sector".
He stated that South Africa would complete the licensing
process for Infraco, a state-owned broadband infrastructure
company, in 2008. Mbeki added that the government has
allocated money for signal broadcaster Sentech to become a
wireless Internet wholesaler, as well as to finance its
digitization. Mbeki expects to provide digital
Qdigitization. Mbeki expects to provide digital
broadcasting to 50% of the population by the end of 2008.
(Engineering News, February 8, 2008)

SARB Emphasizes Growth over Inflation

PRETORIA 00000325 002.2 OF 004


5. (U) The South African Reserve Bank's (SARB) Monetary
Policy Committee (MPC) left the policy interest rate
unchanged for the first time in nine months, at 11.0%. In
doing so, the MPC gave more weight to domestic and global
economic uncertainties and the moderation of domestic
consumption spending than to South Africa's deteriorating
inflation outlook. CPIX-inflation (consumer price
inflation excluding mortgage interest rates) has exceeded
the upper end of the inflation target range of 3-6% for the
ninth consecutive month, reaching an almost 5-year high of
8.6% in December 2007. Inflation was mostly driven by food
and energy prices. The MPC expected inflation to remain
above the target range until the end of 2008, with the main
risks to inflation arising from food, fuel and electricity
prices as well as the weakening rand exchange rate. Most
analysts, businesses and consumers welcomed the MPC's

South Africa's Rand Depreciates

6. (U) South Africa's Rand depreciated by 13.7% against the
dollar between January 1 and February 13, 2008. The
depreciation was spurred by heavy sales of local shares and
bonds by foreigners. The main reasons for the heavy
selling of local assets were the electricity supply
problem, its impact on economic growth, and fears about
South Africa's ballooning current account deficit.

Growth Target Revised

7. (U) Treasury Director-General Lesetja Kganyago said
South Africa was unlikely to reach its target of 6%
economic growth by 2010 because of slower global expansion
and domestic energy problems. Kganyaho added that the 4.5%
growth rate estimated for 2008 in the medium-term budget
policy statement would also be revised. However, she
played down concerns that the economy could fall into
recession, predicting that the revision of growth targets
would not be large. She noted that the economy remained
resilient. The economy has grown at an average of about 5%
over the past four years. "What we have actually seen is
that current global turmoil will push that back, but talks
of a recession are misplaced," said Kganyago. (Business
Report, February 11, 2008)

Analysts Debate Need for Tax-relief

8. (U) Analysts debated the need for tax relief in Finance
Minister Trevor Manuel's next budget. Taxpayers have
received R89.2 billion ($11.7 billion) in tax relief since
Manuel's first 1997 budget and some analysts called for
further relief. Manuel signaled a policy in his October
2007 budget policy statement to accumulate budget surpluses
when the economy is growing strongly, to moderate excessive
spending, and to run deficits when growth in the economy
slows and needs a boost. Manuel had budgeted for a R16.2
billion ($2.1 billion) surplus in 2008 on the expectation
that the economy would grow 4.5%. However, power cuts and
a global slowdown have reduced growth prospects. Brait
Economist Colen Garrow said this change justified a shift
QEconomist Colen Garrow said this change justified a shift
towards deficit spending and called for more tax breaks.
Sanlam Group Chief Economist Jac Laubscher believed that
the government needed to opt for a stimulatory budget and
should raise capital spending instead. Other analysts
would like to see a balanced budget. Absa Economist Ridle
Markus urged caution in spending as "this is not the time
to overspend". However, he said that priority should be
given to Eskom's expansion plans and that some of the
funding should come from the government. (Business
Report, February 11, 2008)

PRETORIA 00000325 003.2 OF 004

Retail Sales at Six-Year Low

9. (U) Statistics South Africa (StatsSA) reported that
retail sales decreased by 0.5% y/y in December, the lowest
level in six years. Retail sales slowed from a 9.6% growth
rate in 2006 to 5.1% in 2007, the lowest annual growth rate
in three years. Analysts said the fall in the main gauge
of consumer spending provides further confirmation of
slowing consumer spending on the back of rising
inflationary pressures, high debt levels, and high interest
rates. It confirms concerns raised by some analysts that
South Africa is heading into a consumer recession on a real
basis. The South African Reserve Bank (SARB) raised
interest rates by 400 basis-points between June 2006 and
December 2007 in an effort to bring inflation under
control. Consumer spending has been the main driver of
economic growth in the past few years and its decline could
depress gross domestic product expansion in 2008. The
slower growth, which may be further dampened by a crippling
energy crisis, could close the door on more rate hikes, and
some analysts are starting to look ahead to possible cuts
later this year or in early 2009, despite a still bleak
inflation outlook. (Fin 24, February 13, 2008)

Credit Rating Remains Stable

10. (U) The global and domestic challenges facing South
Africa do not threaten the stable outlook on its mid-
investment grade rating, global rating agency Standard &
Poor's said on February 14. "As long as the slowdown is
moderate, it won't undermine the outlook we have," said S&P
Managing Director for South Africa and sub-Saharan Africa
Konrad Reuss. Reuss predicted that gross domestic product
growth would slow to 4% in 2008, in contrast to average
growth of 5% over the last four years. Reuss said S&P did
not foresee a recession for South Africa, since the extent
and duration of power cuts that hit business, industry and
homes in January were unlikely to be repeated. He also
played down the substantial outflows from local equity
markets last month, which will make it harder to finance
South Africa's large current account deficit. "At this
point, from what we have seen and heard, investors have not
turned negative on South Africa. But it highlights the
fact that all the players and decision makers will have to
tread carefully," Reuss said. S&P officially opened its
South Africa office in Johannesburg on February 13.
(Business Day, February 15.)

PetroSA: Crude, But Effective

11. (U) National oil company PetroSA has won "tacit"
approval to build an oil refinery at the Coega Industrial
Development Zone near Port Elizabeth. The "Mthombo"-dubbed
project for a 200,000 barrel per day refinery was mooted
last year. A Coega spokesman said the project should break
ground in 2010 and be completed in 2014/2015. Two
competing projects appear to have fallen by the wayside:
Bidevco (a BEE company) partnered with Brazilian oil
company IOR and South African Drako Oil - with ambitious
plans for three refineries in South Africa. PetroSA's
Qplans for three refineries in South Africa. PetroSA's
spokesman said the Mthombo plant would be in line with the
parastatal meeting its obligation to guarantee the
country's fuel security. The Mthombo plant would also be
in line with a draft energy security master plan for the
liquid fuels industry. South Africa refines 700,000
barrels of oil per day, but imported as much as 1.2 billion
liters (7.6 million barrels) of refined product last year.
There has been a lack of investment, largely due to the
unexpected surge in demand for liquid fuels and the poor
returns offered by such large capital-intensive
investments. PetroSA says the Mthombo plant is sized to
satisfy South African demand, but could be expanded to

PRETORIA 00000325 004.2 OF 004

allow for exports and growth opportunities. (Financial
Mail, February 15, 2008)

Lanseria Airport Expands

12. (U) Lanseria International Airport Manager Gavin Sayce
reported that increased domestic flight offerings have
prompted a number of expansion projects. Sayce said the
expansion was driven by Kulula Airline's new daily flights
from Lanseria to popular domestic destinations such as Cape
Town, Durban, Port Elizabeth, and East London. The
Lanseria airport decided in October 2007 to increase its
apron capacity by about 215,280 square feet. Sayce added
that a new terminal building could be built to serve
domestic flights, with the existing terminal building
serving international flights. The airport can currently
accommodate 500,000 passengers a year. According to Sayce,
Lanseria is aspiring to develop into an airport that will
serve the sub-Saharan African region. "With the increased
flights coming into OR Tambo International, a lot of
flights could be diverted to Lanseria." The imminent
introduction of Boeing A380s at OR Tambo means that the
airport will have to increase its capacity. During this
phase, "Lanseria will be needed to serve passenger
overflow," said Sayce. Lanseria can accommodate the Boeing
757-300 and the Airbus A319. (Engineering News, February 8,

Cell C Recovery Campaign Pays Off

13. (U) Mobile operator Cell C expected full-year core
profit to rise by over 30% as a turn-around plan pays off.
Newly appointed CFO Fabrizio Mambrini said the struggling
mobile firm's expected revenue growth would be "quite
outstanding" after it launched a drive to increase
subscribers. "The company has made significant
improvements in 2007 already." he said. Unlisted Cell C,
which releases its full-year results in March, has
struggled to carve out market share in South Africa and has
been weighed down by enormous debts. Mambrini said Cell
C's recovery campaign, which includes a range of promotions
and a plan to focus on the lower end of the market, had
borne fruit. Cell C had 3.3 million South African
subscribers at the end of June 2007, compared with rival
Vodacom's 24 million and MTN's 14 million. Mambrini said
he saw room for growth despite talk that the South African
market, with up to 80% mobile phone penetration, is
saturated. (Engineering News, February 12, 2008)


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