Cablegate: South Africa Economic News Weekly Newsletter April 11, 2008

DE RUEHSA #0763/01 1020914
R 110914Z APR 08





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1. (U) Summary. This is Volume 8, issue 15 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Reserve Bank Lifts Repo Rate
- Surprise Surge in Factory Output
- Eskom Defends Hikes as Predictions Were Off
- Even State Housing Projects Can't Plug In
- DEAT Rejects Titanium Mining Proposal
- Oops! Ugandan Minister Publicly Criticizes SAG Telecom Policies
- Telkom Flounders over Business Strategy
- Oger to Renew Telkom Bid
- Neotel Brings Competition to Telkom
End Summary.

Reserve Bank Lifts Repo Rate
2. (U) The South African Reserve Bank (SARB) raised its policy
interest rate (repo rate) by 50-basis-points to 11.5% on April 10,
after inflation surged to a five-year high and moved further away
from the 3-6% target range. The half-percentage-point rise resumes
a monetary tightening cycle that paused in January on concerns over
economic growth, and brings the total rate hikes to 450 basis-points
since June 2006. While consumer spending has cooled, inflation
continues to beat expectations, with the targeted CPIX inflation
(CPI less mortgage interest) hitting 9.4% y/y in February, the 11th
month it has exceeded the target band. (Business Day, April 10,

Surprise Surge in Factory Output
3. (U) Statistics South Africa (StatsSA) reported that manufacturing
output increased from 1.2% y/y in January to 3.5% y/y in February.
The increase surprised markets. Power outages and waning consumer
demand had fanned fear of a fall in output in the manufacturing
sector, which accounts for more than 16% of the economy. "Barring a
collapse in March, output in the sector will probably be less of a
drag on first-quarter growth than we anticipated," said Citigroup
Economist Jean Francois Mercier. Mining and manufacturing are seen
to have been hit hardest by Eskom's power shortages. Gains were
most pronounced in value-added sectors such as vehicles and parts,
which rose 6% in February, electrical machinery, which rose 16.7%,
and household appliances, up 9.9%. Analysts said resilience in
manufacturing output stemmed from the depreciation in the rand, more
than 12% weaker against the dollar and 16% weaker on a
trade-weighted basis this year. "Weakness in the rand from the
beginning of 2008 is inflating the value of manufacturing sales and
supports manufacturing exports, which in turn should provide
momentum to production," Efficient Research Economist Fanie Joubert
said. However, the outlook for the sector this year is still poor,
in the face of a global slowdown, waning consumer demand, and
continued power rationing. (Business Day, April 10, 2008)
Eskom Defends Hikes as Predictions Were Off
4. (U) Eskom has justified its request for a 53% real increase in
its electricity tariffs (also referred to as 60% nominal increase)
by stating that the price is too low and consumers should carry the
costs of fuel and coal price hikes. Eskom CEO Jacob Maroga said
Qcosts of fuel and coal price hikes. Eskom CEO Jacob Maroga said
Eskom could not accurately predict coal prices, particularly spot
coal, over a multi-year pricing model. Maroga said there were three
main drivers for the price increase: the short-term contracts for
coal supply, which include increasing transport costs; the rising
cost of diesel, which is used in some turbines; and Eskom's attempts
to fast-track certain projects on the demand side that would cost
more money. Coal stock levels were hampered recently by rains and a
strike. Contracts have now been secured for 39 million tons of
additional coal over the next two years. Maroga said,
"load-shedding is not our preferred option. It pains us to do so,
and we know it causes consumers a lot of stress. It can be avoided
if customers reduce their consumption." Electricity regulator NERSA
gave Eskom permission to have "commercially sensitive" information
on its tariff increase withheld from publication. The entire
application was to be posted on the NERSA web-site for public
comment. NERSA recently asserted that if Eskom achieved its
requested increase, the state power supplier would earn a whopping

PRETORIA 00000763 002.2 OF 004

after-tax profit of over $1.5 billion. (Pretoria News, Engineering
News, April 3-8, 2008)
Even State Housing Projects Can't Plug In
5. (U) Two low-cost National Housing Finance Corporation (NHFC)
housing projects involving 834 housing units and a total investment
of $13 million are at risk because of Eskom's new policy on new
developments. A NHFC spokesperson confirmed that these projects
would be at risk if Eskom did not provide electricity to new
low-cost housing projects, even though this project already has
approved loans. Eskom said last month it would take up to six
months to give a quote on new applications for projects requiring
more than 100 kilovolt amperes of electricity. Eskom confirmed its
recent rejection of an application for bulk electricity supply to a
public-private partnership for a mixed housing development that
would provide 9,315 residential units. The construction industry
has been particularly critical of this policy. (Business Report,
April 2, 2008)
DEAT Rejects Titanium Mining Proposal

6. (U) The Department of Environmental Affairs and Tourism (DEAT)
rejected Australia-based Mineral Commodities' (MRC) proposal to mine
titanium in the Xolobeni dunes of Port Edward south of Durban.
Exploratory drilling revealed that the dunes contain the
tenth-largest titanium deposits in the world, which could be worth
over R10 billion ($1.3 billion). MRC argued that the operation
could help eradicate poverty by developing the area and creating job
opportunities with minimal environmental impact. DEAT rejected
MRC's environmental impact assessment report and cited deficiencies
in several areas. According to DEAT, the MRC report does not
address dune rehabilitation or waste storage and treatment issues.
The dunes lie next to nature reserves on the border of the Kwa-Zulu
Natal and the Eastern Cape Provinces, which are slated for
ecotourism development. A DEAT report classified the area as one
of the highest conservation priority areas. A Department of
Minerals and Energy official lamented that a compromise, "win-win"
situation could only be achieved if DEAT was not trying to declare
the entire coastline off limits for mining. Meanwhile, an amendment
in the National Environmental Management Act to make DEAT the final
appeals authority on mining EIA is well underway. (Financial Mail,
April 11, 2008)

--------------------------------------------- --
Oops! Ugandan Minister Publicly Criticizes SAG Telecom Policies
--------------------------------------------- --
7. (U) Uganda's Minister for Information and Communications
Technologies Alintuma Nsambu chided the SAG for meddling too much in
the telecom sector, saying a lighter touch would grow the industry,
cut the cost of services and help local companies to flourish.
Nsambu was sharing a stage with SA Science and Technology Minister
Mosibudi Mangena at the Satcom Africa conference in Johannesburg,
when he suggested that SA should rethink its telecoms regulations.
Later he apologized for making his criticisms in public instead of
QLater he apologized for making his criticisms in public instead of
discussing them in private. Mangena said the reproaches should be
directed at SA's Department of Communications and Department of
Trade and Industry instead. According to Nsambu, the government's
role should be to support private companies by removing any
bottlenecks, such as ensuring that officials did not need bribing to
get things done or to allow equipment to clear customs.
"Liberalizing the telecom sector means discouraging monopolies or
duopolies," he said in a dig at SA, where Neotel was belatedly
granted the sole license that opened up competition to Telkom. Then
he took another jab, saying the private sector should be left to
build and operate under-sea telecommunications cables. SAG is
already championing its involvement in at least two under-sea cable
projects, and is jeopardizing plans to increase Africa's bandwidth
by insisting that private cables may land in SA only if they are
majority African-owned. Nsambu attacked the high cost of Internet
access in SA, even though the country is not reliant on expensive
satellite connections. "Ironically, in SA the cost of internet
usage isn't cheap," he said. Much of SA's international traffic is
carried on the undersea cable with prices that Telkom has kept
artificially high. Nsambu said full liberalization of the telecoms
sector was extremely important for any nation's economy. Mangena
denied that progress in SA was shackled by the SAG's regulation of
undersea cables or by creating Infraco as a state-owned supplier of

PRETORIA 00000763 003.2 OF 004

broadband infrastructure. Some areas could be liberalized further,
but the regulatory environment laid the ground rules rather than
inhibited progress, Mangena said.
Telkom Flounders over Business Strategy
8. (U) After playing up its plans to become a significant force in
the pay-TV industry, fixed-line operator Telkom has changed
direction and is leaving the sector. CEO Reuben September surprised
analysts when he outlined plans to reduce Telkom's shareholding in
Telkom Media from 66% to what he describes as "the smallest possible
stake". At the same time, Telkom has announced plans to take the
fight to the cellular operators, including associate Vodacom, in
which it holds a 50% stake, by building its own mobile network. The
plan illustrated the untenable nature of the company's stake in
Vodacom. Both Vodacom and MTN are building national fixed-line
networks that will enable them to compete aggressively with Telkom.
The latest developments have some analysts wondering whether Telkom
has a coherent strategy. In pay-TV, it is clear that management has
had a change of heart. The company now says there are other
projects that will deliver a better return more quickly. These
include offshore expansion and investment in new wireless networks.
September obfuscated when asked whether Telkom was open to selling
its stake in Vodacom without an alternative mobile investment lined
up. Domestically, Telkom planned to invest in a fixed-wireless
network and in a mobile data network that will compete with the MTN
and Vodacom offerings. However, Telkom could still find itself the
prey of a larger operator. It has already rejected a non-binding
offer from Oger Telecom of Dubai, but September said the company has
"no emotional hang-ups" about selling part or all of the business if
the right offer is tabled.
Oger to Renew Telkom Bid
9. (U) CEO Paul Doany said Oger Telecom of Dubai will renew its
offer for Telkom. Telkom said it would not consider the sale
without a "strategic rationale" and rejected Oger's undisclosed
proposal on grounds that it was not in the shareholders' interest.
But Doany, also chairman of land-line operator Turk Telekom, told
Reuters that Oger planned a fresh offer that will benefit all
stakeholders. Oger, controlled by the family of late Lebanese Prime
Minister Rafik Hariri, also operates in Saudi Arabia, Lebanon, and
Jordan. Doany said Oger's Telkom offer, which was for a substantial
minority stake with management control, would aim at merging Oger's
South African mobile subsidiary Cell C (the number three mobile
operator after Vodacom and MTN) with Telkom's fixed-business. Doany
dismissed Telkom's concerns that Oger's offer did not have a
strategic rationale. Doany said Oger wanted to create a structure
in South Africa similar to Turkey, where it has a controlling 55%
stake in Turk Telekom and 81% in Avea (Turkey's third-largest mobile
operator). "We are producing good results in Turkey and we want to
have the same in South Africa because the two markets resemble each
Qhave the same in South Africa because the two markets resemble each
other in many ways," he said. "We fully support the expansion plans
of Telkom in the African continent, with South Africa being a
natural for such expansion, focusing on segments hitherto neglected
by other operators." (Engineering News, April 3, 2008)
Neotel Brings Competition to Telkom

10. (U) Neotel clocked up R1 billion ($128 million) in business in
its first year of operation and is expected to win deals worth R2
billion ($256 million) in fiscal year 2008. However, profits are
still a long way off as capital expenditures of R1.5 billion ($192
million) will soak up revenue as it rolls out more wireless and
fiber-optic network facilities. Neotel's plans include a R11
billion investment over the next ten years. CEO Ajay Pandey said
its cash flow should turn positive after three years. "Out of the
top 350 customers, we have made inroads into almost 120 and we are
beginning to get repeat orders." So far, most companies have given
Neotel only about 5% of their telecoms spending, but a handful now
give it at least 25% of their voice and data contracts. From the
end of April, consumers in certain areas would be able to sign up
for a Neotel line instead of a Telkom line. Neotel will also offer
handsets capable of handling video calls and accessing the internet.
Telkom announced plans to bulk up its own voice and data carrying
capacity, largely by installing more wireless technologies. Pandey
said that was a smart move, as global studies showed that operators
benefited most from market liberalization if they expanded and sold

PRETORIA 00000763 004.2 OF 004

spare capacity to rival players. Refusing to let rivals access
their infrastructure might appear to be a strategic advantage, but
operators that had kept their network facilities solely for their
own use were far less successful than those that capitalized on the
growing demand as more rivals entered the market, Pandey said.
Pandey said he would be happy to lease some of Telkom's
infrastructure, but its high prices meant it was more cost effective
for Neotel to build its own. (Business Day, April 4, 2008)


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