Cablegate: South Africa Economic News Weekly Newsletter April 4, 2008

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1. (U) Summary. This is Volume 8, issue 14 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- SA Achieves a 0.9 % Budget Surplus
- Manufacturing Activity Dips to Near-Five-Year Low
- Trade Deficit Narrows, But Outlook Still Negative
- South Africa and Turkey Seek Stronger Economic Ties
- SAA and Turkish Airlines to Boost Passenger Volumes through Star
- Smelters and Power - Eskom Favors Sticks over Carrots
- Set-Back for Independent Power Production
- Under-Utilized Land Targeted for Bio-fuels Crops
- Mining Skills Exodus
End Summary.

SA Achieves a 0.9 % Budget Surplus
2. (U) Finance Minister Trevor Manuel announced that South Africa
had achieved a budget surplus of 0.9% of gross domestic product
(GDP) in FY 2007/08. Manuel said a revenue overrun and under
spending had pushed the surplus on the state's budget in FY2007/08
from an estimated R10.7 billion (0.5% of GDP) to R18.5 billion (0.9
% of GDP). According to the South African Revenue Service (SARS),
personal income tax rose by 20% to R169.1 billion ($21.1 billion),
corporate tax by 20% to R143 billion ($17.9 billion), secondary tax
on companies by 31% to nearly R20 billion ($2.5 billion),
value-added tax (VAT) by 11% to R149.7 billion ($18.7 billion),
excise duty by 1% to R18.1 billion ($2.3 billion), fuel levy by 7%
to R23.5 billion ($2.9 billion), and customs duty by 13% to R26.7
billion ($3.3 billion). SARS said higher corporate income tax
collections were achieved due to higher profits as a result of
strong growth in domestic demand and improved commodity prices.
Improved tax enforcement and compliance, and a broader tax base had
also contributed to higher corporate tax collection. The
manufacturing sector made the biggest contribution to corporate tax
amounting to R32 billion ($4 billion), or 22% of the total R143
billion ($17.9 billion) paid in corporate tax. This was nearly
double the R17 billion ($2.1 billion), or 12% of the total corporate
tax paid by the mining sector. However, mining companies paid 29%
more tax in FY2007/08 than in the previous year, as commodity prices
soared, while manufacturers paid 14% more. According to ABSA
Economist Ridle Markus, the weaker rand, on average R7.05 to the
dollar last year, compared with an average R6.76 the previous year,
has boosted profits for all exporters, as earnings in rand terms are
higher when the rand is weaker. Financial services companies paid
R15.6 billion (11%), or 27% more, while the wholesale and retail
trade sectors contributed R14.2 billion (10 %), 17% more than the
previous year. Banks contributed R11.3 billion (8%) to the total
corporate tax, 30% more than the previous fiscal year. By far the
biggest increase in tax was in the tiny recreational and cultural
sector, which contributed only 2%, but paid a massive 53% more than
the previous year. SARS has achieved revenue overruns almost every
year since its inception in 1998. The overruns are often criticized
because they have pushed the ratio of tax to GDP to about 29%, which
Qis high compared to comparable developing countries, but low
compared to developed countries that have a social security system
in place. (Business Report, April 2, 2008)

--------------------------------------------- ----
Manufacturing Activity Dips to Near-Five-Year Low
--------------------------------------------- ----
3. (U) The Investec purchasing managers' index (PMI) dropped from
46.4 points in February to 43.7 points in March, its lowest level
since June 2003. The fall shows that manufacturing is under
pressure, mainly as a result of easing consumer demand due to higher
interest rates, continued strong inflation and a national power
shortage. "The underlying figures paint a deteriorating picture of
business conditions in the manufacturing sector," said Andre Roux,
head of fixed income at Investec Asset Management, the survey's
sponsors. "Given limited prevalence of power outages during the
month, the decline is a result of the weaker real economy and high
input cost inflation on the manufacturing sector," he said.
(Business Day, April 1, 2008)
--------------------------------------------- ----
Trade Deficit Narrows, But Outlook Still Negative
--------------------------------------------- ----
4. (U) The South African Revenue Service (SARS) reported that SA's

PRETORIA 00000704 002.2 OF 004

trade deficit narrowed sharply from R10.2 billion ($1.3 billion) in
February to R5.8 billion ($0.7 billion) in March, as a weaker rand
boosted the value of exports. Exports leapt 19.3% to R46.95 billion
($5.9 billion) as the value of cars shipped abroad more than doubled
from the previous month, while coal exports rose 17%. Imports
increased 6.4% to R52 billion ($6.5 billion), boosted mainly by
purchases of machinery, electrical equipment, motor vehicles,
aircraft and vessels. Oil accounted for almost 20% of the import
bill and demand for capital imports is rising in response to the
SAG's infrastructure spending drive. Standard Bank Economist
Shireen Darmalingam said the trade balance is likely to stay deep in
the red this year, putting more pressure on the rand to depreciate.
"The deficit on the trade account, coupled with a large deficit on
the current account, leaves the currency vulnerable and in a rather
precarious position going forward, she said. The rand has weakened
about 15% against the dollar so far this year, and nearly 20%
against a trade-weighted basket of currencies monitored by the South
African Reserve Bank (SARB). The trend is seen as inevitable given
the deficit on the current account, which widened to 7.3% of gross
domestic product (GDP) in 2007, a 36-year peak. The deficit was
financed by foreign purchases of shares and bonds in recent years,
but so far this year the flows have reversed, on rising global risk
aversion and concerns over slower local economic growth. (Business
Day, April 1, 2008)
South Africa and Turkey Seek Stronger Economic Ties
5. (U) South African Minister of Trade and Industry Mandisi Mpahlwa
and Turkish Minister of Energy and Resources Dr Hilmi Guler
participated in an inaugural Joint Economic Committee (JEC) meeting
in a bid to boost bilateral trade and investment ties. Turkish
trade statistics indicate that the volume of bilateral trade for
2007 stood at $2.8 billion with more than 76%, or $2.1 billion, of
that arising in the form of South African exports to Turkey. Agenda
items for the meeting included a program of action for sectors in
which the two countries aim to cooperate. South Africa was Turkey's
largest trading partner in Sub-Saharan Africa and Turkey had a
stated goal of boosting its trade with Africa to $30 billion by
2010. (Engineering News, March 28, 2008)

SAA and Turkish Airlines to Boost Passenger Volumes through Star

6. (U) The Turkish national carrier joined the Star Alliance group
on April 1, 2008. Turkish Airlines is adding an additional 31
destinations to Star Alliance's destinations, and South African
Airways (SAA) CEO Khaya Ngqula said it was already in discussions
with the Turkish carrier. Ngqula said that talks were under way to
sign a code-sharing agreement. SAA Head of Network Development,
Alliances and Aero-political Affairs Jason Krause explained that
such an agreement would mean that SAA would link its major hub in
Johannesburg with Turkish Airline's hub in Istanbul. Krause said
QJohannesburg with Turkish Airline's hub in Istanbul. Krause said
that Turkish Airlines currently operated three weekly flights
between Istanbul and South Africa, flying to Johannesburg and Cape
Town. A code-sharing agreement would allow SAA to operate the
Turkish carrier's final leg-the stretch between Johannesburg and
Cape Town-on its domestic flights. Krause said that this move would
add at least 540 additional passengers a week to SAA's domestic
flights, and that it would also allow it to sell Istanbul as a
destination. Turkish Airlines would also be able to use its
aircraft more strategically, he added. (Engineering News, April 2,

Smelters and Power - Eskom Favors Sticks over Carrots
7. (U) A Business Day editorial questioned BHP Billiton's firing of
its banker Standard Bank for suggesting that BHP's Hillside aluminum
smelter at Richards Bay be shut down as the smelter did not provide
economic value to SA and was consuming a great deal of electricity.
The company took umbrage and instructed staff to pull a big chunk of
its business from Standard Bank. The editorial noted that the
smelters are Eskom's most energy intensive customers, using 2,100 MW
or more than five percent of Eskom's total capacity and employ
relatively few people. During the power crunch, are there economic
benefits that outweigh the energy disadvantages, asked the
editorial? A separate report by Standard & Poor's suggested that

PRETORIA 00000704 003.2 OF 004

the power shortages are a stress to the economy, rather than a
ratings threat. S&P projects that it would take until 2013 before
electrical power capacity attains the level required to meet
expected demand with a 15% buffer. In January, S&P placed state
power supplier Eskom on Credit Watch with negative implications on
expectations of a material increase in the capital expenditure
program. The rating agency observed that some relief might come
from a hike in electricity prices, noting Eskom's recent application
for a 60% tariff increase to combat rising coal and fuel costs.
Meanwhile, over 100 firms have responded to Eskom's request for
cogeneration projects, potentially adding 1,000 to 3,000 MW to the
national grid if Eskom can work out power purchase agreements.
Eskom continues to criticize residential and small commercial
customers for failing to curb their power use, threatening to impose
greater load-shedding. Eskom so far has favored "sticks" over
"carrots" in seeking to modify consumer behavior. (Business Day,
Engineering News, April 2-3, 2008)
Set-Back for Independent Power Production
8. (U) The Department of Minerals and Energy terminated a R5 billion
($650 million) contract with a consortium led by U.S. power producer
AES to build two open-cycle, gas turbine plants. The contract was
awarded in August 2007 and was the first awarded to an independent
power producer (IPP). It was hailed as a boost to independent
producers. However, DME has claimed that AES could not meet its
obligations and has pulled the plug on the contract. AES
Spokeswoman Robin Pence said the company had been content for the
contract to lapse because the project was no longer viable. Asked
if the parameters were changed after the contract award, Pence said
yes, but declined to give further details. AES would have owned and
operated the two plants - one near Durban with a generating capacity
of 760MW and the other near Port Elizabeth with a capacity of 342MW
- and Eskom would have bought the electricity for 15 years. With a
combined generating capacity of 1000MW - the equivalent of just less
than 3% of SA's current generating capacity - the plants would have
provided much-needed peaking power generation capacity to mitigate
the country's electricity supply problems. DME Officials emphasized
that while the DME was still "looking to go forward with the process
of attracting IPPs", the prognosis was bleak with the demise of this
deal. The DME could seek an alternative operator, but delays were
likely. The two plants were expected to have been operational
before the end of 2009. With the termination of AES's contract, that
ambitious timeline is unlikely to be kept. This is also a blow to
plans to dilute power utility Eskom's monopoly on power generation.
The SAG has established a policy requiring that the private sector
build 30% of new generating power through IPPs. Despite the
government's stated intention of encouraging private sector
participation, an unattractive regulatory environment and power
prices that are too low to be globally competitive have kept IPPs at
Qprices that are too low to be globally competitive have kept IPPs at
bay. (Business Day, April 3, 2008)
--------------------------------------------- ---
Under-Utilized Land Targeted for Bio-fuels Crops
--------------------------------------------- ---
9. (U) South Africa's draft bio-fuels strategy suggests the use of
the more than 2.5 million hectares of under-utilized land in the
former homeland regions to grow bio-fuel crops. The plan is
designed to breach the gap between the country's "haves" and the
"have-nots" by allowing new farmers to grow bio-fuel crops.
Department of Agriculture Director of Agricultural Engineering
Services At van Coller noted that the targeted areas would be in the
eastern parts of the country, because climate change is anticipated
to increase rainfall in this part of the country. However, he
cautioned that it would be costly to develop these areas because of
lack of adequate transport and storage infrastructure. Van Coller
estimated that it could cost up to $1,900-$2,500/hectare to develop
this land, compared to $650/hectare for unutilized commercial
farmland. Van Coller added that the final development plan for
these areas could cost the SAG over $6.26 billion before bio-fuels
production could commence. (Business Day, March 27, 2008 and
Business Report, March 26, 2008)
Mining Skills Exodus

10. (U) Gold Fields CEO Ian Cockerill became the fourth South
African mining chief within a year-and the third in the gold
sector-to announce his resignation. His departure follows the
resignations of Anglo Platinum CEO Ralph Havenstein, Harmony Gold

PRETORIA 00000704 004.2 OF 004

Mining's CEO Bernard Swanepoel, and AngloGold's CEO Bobby Godsell.
Cockerill said he had been made an "intriguing" offer by a company
outside the gold sector. Cockerill will be succeeded by CFO Nick
Holland, who has held that post for ten years. An industry insider
attributed the skills exodus from both senior and middle mining
management to government interference, growing concerns about the
power crisis and political transition, and an upsurge in crime. A
separate news piece noted that mining academics at the Wits School
of Mining Engineering are leaving South Africa for salaries three
times higher abroad. South Africa continues to provide a good
training ground to meet demand abroad as a result of the commodities
boom. (Business Day, April 1-2, 2008)


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