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Cablegate: South Africa Economic News Weekly Newsletter March 28, 2008

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RUCPCIM/CIMS NTDB WASHDC
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RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHJO/AMCONSUL JOHANNESBURG 7960
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USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
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TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
PGOV, SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER MARCH 28, 2008
ISSUE

PRETORIA 00000653 001.2 OF 004


1. (U) Summary. This is Volume 8, issue 13 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- CPIX Soars
- Employment Up 0.8%
- Heineken to Open Brewery in SA
- Nissan Expands Truck Production Facility
- Concerns about Electricity-Price Increase - Government and ANC
Disagree
- SADC Closer to Single Tourism Visa
- Tourist-Friendly Program Launched
- Private Sector to Participate in Government's
West Coast Cable Project
- EASSY Cable Project Begins Construction
- Government Set to Reduce Telecom Costs to Promote Call
Centers
End Summary.

----------
CPIX Soars
----------
2. (U) CPIX inflation (consumer price inflation excluding mortgage
interest rates) surged from 8.6% y/y in January to 9.4% y/y in
February, according to Statistics South Africa (StatsSA). This
increase represented a five-year peak. Higher food and fuel prices
were the main drivers of inflation. CPIX inflation has breached its
3%-6% target range for 11 months running and is expected to peak
near 10% next month, as the rand's depreciation and looming hikes in
electricity tariffs feed into prices. The South African Reserve
Bank (SARB) has raised interest rates by four percentage points
since June 2006 in a bid to stem inflation, but so far the effect
has only been seen in waning consumer demand, the main engine of
economic growth in the past. This is worrying analysts at a time
when the global economy is slowing and an electricity crisis is also
curbing growth. SARS Governor Tito Mboweni said he would take
"whatever action was needed to anchor inflation expectations at the
low side" and that there was no danger of "overdosing" the economy
with higher interest rates. "If there is an overdose of any
medicine, there is a danger of killing the patient. I don't think
we are in that situation now. We have seen much higher interest
rates," he said. Prime lending rates set by commercial banks stand
at 14.5%, their highest level in eight years, but well below a peak
of more than 25% in 1998. At its latest policy meeting in January,
SARB kept interest rates steady, giving more weight to the threat to
growth than the deteriorating inflation outlook, which stems mainly
from rising global food and oil prices. Some analysts believe this
will remain the case when the SARB's monetary policy committee (MPC)
meets on April 9-10, but local money markets are now pricing in an
80%-90% chance of another rate hike. "It seems clear that the MPC
is now more concerned about inflation than growth and will pick up
where it left off in December," said Lehman Brothers Analyst Peter
Attard Montalto. (Business Day, March 26, 2008)

------------------
Employment Up 0.8%
------------------
3. (U) The number of people employed in South Africa's
non-agricultural sectors increased by 0.8% from the third quarter to
the fourth quarter of 2007, according to Statistics South Africa
(StatsSA) data. Consumer demand helped support the retail and
financial services sector, increasing employment in those sectors by
2.2% and 1.2%, respectively, in the fourth quarter. StatsSA
reported that manufacturing sector jobs fell by 0.5% in the fourth
Qreported that manufacturing sector jobs fell by 0.5% in the fourth
quarter while employment in the mining industry was steady.
Unemployment decreased from 25.5% in March 2007 to 23.0% in
September 2007. Analysts have said while unemployment may be
showing a downward trend it remains high as the workforce is largely
unskilled, a legacy of apartheid. High unemployment and poverty
have clouded economic gains since the end of apartheid in 1994 and
are seen as the main reason for the high level of violent crime.
(Business Day, March 27, 2008)
-------------------------------
Heineken to Open Brewery in SA
-------------------------------
4. (U) International brewer Heineken will build its new $407 million
South African brewery in the Sedibeng area south of Johannesburg.
Heineken Regional President for Africa and Middle East Tom de Man
said that the location of the brewery was based on more than just

PRETORIA 00000653 002.2 OF 004


geology, geography and infrastructure. "We are also very aware that
southern Johannesburg is an area that will benefit enormously from
new commercial investment, which will in turn assist and enable
social and economic progress in the whole area," he said. The
company announced early in March that it would build the brewery, in
which the British company Diageo would own a 25% stake, to brew a
range of Heineken and Diageo brands. The brewery will replace
capacity Heineken lost in the South African local market when it
terminated its contract with local brewer SAB last year. The
Sedibeng brewery site would have an initial capacity of
three-million hectolitres, with the flexibility to expand. Work was
already under way on the site and construction is expected to be
completed by the end of 2009. The company anticipated that the
brewery would initially create some 225 new, permanent jobs and a
considerable number of new, service-related outsourcing
opportunities. Heineken would provide technical training for South
African personnel in South Africa and abroad. (Engineering News,
March 26, 2008 and Business News, March 27, 2008)
----------------------------------------
Nissan Expands Truck Production Facility
----------------------------------------
5. (U) Local truck company Nissan Diesel South Africa (NDSA)
officially opened its new R10.9 million ($1.3 million) production
and warehouse facilities in South Africa. The facility upgrades
would enable Nissan Diesel to boost its production from the current
4,500 units to 9,000 trucks a year. NDSA said that it had expanded
the physical truck assembly building and installed additional
equipment to ease assembly processes. "With the benefit of
increased production capability and the launch of our new flagship
model range this week, we are intent on strengthening our position
even further," said NDSA Chief Executive Hiroshi Yokofujita. NDSA
is currently the third-largest truck-seller in South Africa.
(Engineering News, March 25, 2008)
-------------------------------------------
Concerns about Electricity-Price Increase - Government and ANC
Disagree
-------------------------------------------

6. (U) South Africa's cabinet said on March 20 that the response to
state utility Eskom's request to raise electricity tariffs by as
much as 60% "was understandable, but premature", qualifying the
request as a proposal subject to consideration by the regulator and
stakeholders. The National Regulator of South Africa (NERSA)
announced that it would take three months to respond to Eskom's
request. The government came out in support of Eskom's proposed 60%
electricity price increase, saying it was needed to cover sharp
increases in fuel costs and to implement an accelerated demand side
management program. The significant new build program would be
funded by other sources. The government said, "South Africans must
come to terms with the reality that it would be difficult for Eskom
to continue providing the cheapest electricity rate in the world."
The ruling African National Congress party spoke out against the
increase, saying that the price hike would have "adverse effects on
Qincrease, saying that the price hike would have "adverse effects on
the daily lives of the poor people," as well as inflationary
effects. Meanwhile, Eskom reported that it was still waiting for
some mines to come forward with requested information to make the
determination on how to allocate the extra five% of poorer
requirements offered to deep mines. Easter break brought some
relief and stability to the tight South African power system, so the
risk of load-shedding was low during the week of March 24. (Sunday
Times, Engineering News, March 20-23, 2008)

----------------------------------
SADC Closer to Single Tourism Visa
----------------------------------
7. (U) The Southern Africa Development Community (SADC) has agreed
to speed up the process of establishing a single visa (a Univisa)
for tourists. The decision was taken at a ministerial conference in
Luanda, Angola last week, and was announced by South African Deputy
Tourism Minister Rejoice Mabudafhasi on March 25. The conference
also encouraged removal of obstacles to the movement of SADC
citizens within the region through bilateral agreements, which
include visa waivers. The nine member states which have signed the
protocol on the free movement of citizens are Botswana, the DRC,
Lesotho, Mozambique, Namibia, South Africa, Swaziland, Tanzania and
Zimbabwe. Mabudafhasi said: "Statistics of foreign arrivals
gathered in the past few years provide clear evidence that the SADC
region is amongst the top preferred destinations by tourists in the
world. Noting this encouraging development, the Inter-Ministerial

PRETORIA 00000653 003.2 OF 004


Committee representing SADC member states is currently exploring
further avenues such as the Univisa to optimize tourism income. The
Univisa is expected to operate similarly to the European Schengen
visa system. (Business Report, March 26, 2008)
---------------------------------
Tourist-Friendly Program Launched
---------------------------------
8. (U) South African Tourism (SA Tourism) CEO Moeketsi Mosola said
the country needs to develop a tourist-friendly mind-set to meet its
2010 tourism targets to attract 10 million foreign tourists. He
warned that South Africa's competitiveness would depend on its
ability to offer affordable air travel, increasing skills
development in the tourism industry, tourism product development and
tackling crime and security head on. Mosola said that though
tourism was "one of the biggest success stories" of the past decade,
SA needed to "move up a gear" to meet its target by 2010. To
educate the nation, and young South Africans in particular, SA
Tourism has launched a series of lectures on university campuses
this year to raise public awareness. The Global Competitive Program
by Tourism SA aims to highlight areas where focused attention and
investment will improve the visitor experience, grow the number of
arrivals and develop the economic contribution objectives, Mosola
said. Between September 2006 and September 2007 more than nine
million tourists visited SA, a 9% y/y increase and above the global
growth average of 5.6%. According to Mosola, the industry created
more than one million jobs in the past 15 years but there was
ignorance among South Africans about the economic value of tourism
and the need to grow a tourist-friendly mind-set.
---------------------------------------------
Private Sector to Participate in Government's
West Coast Cable Project
---------------------------------------------
9. (U) State-owned broadband infrastructure company Broadband
Infraco has secured private sector participation for its
fiber-optic, submarine cable project from South Africa along the
west coast of Africa to the UK. The companies expected to sign a
shareholders agreement on April 15 were Telkom, Neotel, Tenet, Tata
Communications, Multichoice, Vox Telecom, Internet Solutions,
Gateway Communications, Equator Telecom Nigeria, and British
Telecom. Broadband Infraco, through the Department of Public
Enterprises, would hold a 26% stake in the cable and its capacity,
and the remaining 74% was earmarked for the private sector. A
memorandum of understanding outlining the principles of operation
was signed at the end of February between Broadband Infraco and the
private sector participants. The percentage of the total capital
input invested by a company would translate into the percentage of
the broadband capacity that the company would get once the cable was
operational. It was understood that the principles agreed to allow
each participant to determine their own market pricing of bandwidth
on the system. Bids from suppliers to construct the system were
already under evaluation by the consortium members, and supply
contracts were scheduled to be signed before end April. The cable
Qcontracts were scheduled to be signed before end April. The cable
is expected to enter service during the first half of 2010. The
system made provision for about 12 landing stations along the
African West coast, which could be built at a later stage.
(Engineering News, March 27, 2008)
---------------------------------------
EASSY Cable Project Begins Construction
---------------------------------------

10. (U) Construction on the fiber-optic East African Submarine Cable
System (EASSY) project, which would connect 21 East and Southern
African countries to each other and the rest of the world, started
on March 27. According to press reports, the supply contract for
installation of the cable is now in force. The International
Finance Corporation (IFC), the African Development Bank, the Agence
Frangaise de Dveloppement, KfW of Germany, and the European
Investment Bank, were partnering to provide the project's long-term
loan financing of $70.7 million, with $18.2 million coming from IFC.
The $247.1 million balance would be provided by the 25 consortium
members. (Engineering News, March 27, 2008)

--------------------------------
Government Set to Reduce Telecom
Costs to Promote Call Centers
--------------------------------

11. (U) Business Trust Chief Executive Brian Whittaker said a
government announcement reducing telecoms costs for call centers,

PRETORIA 00000653 004.2 OF 004


necessary to ramp up foreign investment in the sector, was expected
within a month. Whittaker explained that global spending on call
centers, or business processing outsourcing, was expected to
increase by $60 billion over five years. But with local telecoms
costs 74% higher than those in India, investment in South Africa was
being held back. Public Works Minister Thoko Didiza confirmed that
the government would make the announcement. Whittaker said: "I
believe an announcement is imminent in lowering the cost specific to
outsourcing operators linked to the Department of Trade and
Industry's incentive scheme." He hoped the cut would result in a
lower cost than India's. A 2 megabit line in South Africa costs R
146,000 ($18,000) a month, while in India it costs R 84,000
($10,300) a month. He said there had been long discussions between
the government and fixed-line operator Telkom. The trade and
industry department's incentive scheme for outsourcing firms
includes grants for new investments and training. Business Trust
trains unemployed people to work in the sector. Call centers are
included as a priority in the government's Accelerated and Shared
Growth Initiative for South Africa (ASGISA). Business Trust hopes
to create a total of 100,000 outsourcing-linked jobs by December
2009. (Business Report, March 26, 2008)

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