Cablegate: South Africa Economic News Weekly Newsletter April 25, 2008

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1. (U) Summary. This is Volume 8, issue 17 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- CPIX at Double Digits
- SA Runs Risk of Sub-prime Contagion,
Standard & Poor's Warns
- Golden Oldies Give JSE Vintage Edge
- SA Cancels Cuba Debt
- BEE Focus Shifts to Skills Development
- SA Scours the World for Skills
- Business Calls on Regulator to Delay Eskom Tariff Hearing
- Beware Sarkozy's Cozy Deals
- Gauteng's Digital Dream Project Criticized
- HP Predicts Exploding IT Growth
End Summary.

CPIX at Double Digits
2. (U) Statistics South Africa reported that the annual rise in
CPIX, South Africa's main inflation gauge, increased from 9.4% in
February to 10.1% in March, its highest level since December 2002.
Most economists had forecasted an increase of 9.7%, but the effect
of soaring food and fuel prices were underestimated. With food and
petrol prices unlikely to recede soon, and hefty electricity price
hikes likely in June, there is a strong risk that inflation could
rise even further in 2008. That will feed into price-setting and
wage negotiations, making further hikes in interest rates more
likely in June and August. "We maintain our view that the Reserve
Bank will have no choice but to hike interest rates by half a
percentage point at the June meeting," JPMorgan Economist Tebogo
Dintwe said. Inflation measured by CPIX, which excludes mortgage
costs, has now breached its 3%-6% target range for 12 consecutive
months. The South African Reserve Bank's mandate is to achieve the
target and, unlike the FED, does not include a requirement to
maximize economic growth, so CPIX is central to its decisions on
interest rates. (Business Day, April 24, 2008)

SA Runs Risk of Sub-prime Contagion,
Standard & -Poor's Warns
3. (U) Global ratings agency Standard & Poor's (S&P) warned that
South Africa is among the countries outside Europe most vulnerable
to the global credit crunch, even though it is not directly exposed
to the fallout from the U.S. sub-prime crisis. South Africa ranked
11th among 40 emerging market countries on S&P's 2008 liquidity
vulnerability index (LVI), mainly because it relies heavily on
volatile portfolio inflows to finance the large current account
deficit. South Africa's current account deficit widened to R145
billion ($18.6 billion), or 7.3% of gross domestic product (GDP) in
2007. The deficit has been comfortably financed by foreign
purchases of local assets, mainly equities, since it first slid back
into the red in 2003. But the inflows have begun to recede since
the end of 2003 as mounting global risk aversion has dented appetite
for emerging markets. So far this year, South Africa has
experienced a net portfolio outflow of R4.2 billion ($0.5 billion),
which compares poorly with a net inflow of R30.5billion ($3.9
billion) in the first four months of 2007. This has weighed on the
rand and may lead to further depreciation of the currency, which
will also have a negative impact on inflation. The rand has lost
Qwill also have a negative impact on inflation. The rand has lost
about 12% of its value against the dollar in 2008. S&P assumes
South Africa's current account deficit will widen to 7.8% of GDP
this year. However, independent forecasts predict the gap will
shrink as strong commodity prices boost the value of local exports.
"Our assessment is that South Africa's dependence on portfolio
inflows is likely to continue and that these will remain volatile in
the coming months, due to the global environment," said S&P analyst
Remy Salters. "The main effect is likely to be the weaker rand. We
assumed it could depreciate by 20%-30% against the dollar this year,
to R8.80 or R8.90." Salters said the rand would remain a "natural
buffer" for the current account deficit but there was a limit to how
much it would depreciate, given South Africa's generally sound
economic fundamentals, which include low levels of external debt.
Earlier this month, S&P affirmed its mid-investment BBB+ credit
rating for South Africa, keeping it on a stable outlook. (Business
Day, April 22, 2008)

PRETORIA 00000881 002.2 OF 004

Golden Oldies Give JSE Vintage Edge
4. (U) Only 19 of the more than 400 companies on the Johannesburg
Stock Exchange (JSE) have been listed for 40 years or more, but
among them are the biggest names in business. Insurance companies
such as Santam and the Liberty Group are on the list, as are mining
companies such as DRDGold and Harmony Gold. Several industrial
stocks are noted, such as African Oxygen and AECI. The total market
cap of the 19 companies is R161 billion ($20.5 billion), just more
than 3% of the JSE's total market cap. The JSE itself is 121 years
old. It opened its doors as the gold rush in the 1880s created a
demand for a centralized market. The oldest company on the JSE is
DRDGold, founded and listed 113 years ago. JSE Head Russell
Loubser, speaking at function held by the JSE to honor its
stalwarts, said the presence of the 19 long-lasting companies had
"helped position the JSE as a world-class stock exchange associated
with high market integrity, efficiency and sound practices".
Measured by market capitalization, which is more than R5trillion
($625 billion), the JSE is one of the globe's 20 largest exchanges
and operates the world's largest single stock futures market.
(Business Day, April 22, 2008)
SA Cancels Cuba Debt
5. (U) Chief Government Spokesman Themba Maseko announced that the
South African Cabinet has approved the cancellation of R926.8
million ($120.4 million) worth of debt owed by Cuba. The debt arose
out of insurance coverage provided to Cuba by the Export Credit
Insurance Corporation of South Africa for the export of diesel
engines and pesticides in 1996. "Given the assessment of Cuba's
debt position, government is of the view that Cuba was not in a
position to meet its obligations in the foreseeable future."
According to Maseko, Cuba's debt position had the potential to
undermine bilateral economic relations and hampered the two
countries from pursuing mutually beneficial relations in areas such
as biotechnology, pharmaceuticals and eradicating tuberculosis and
malaria in Africa. (Mail and Guardian, April 17, 2008)
BEE Focus Shifts to Skills Development

6. (U) South African corporations are beginning to focus on elements
of Black Economic Empowerment (BEE) other than equity ownership,
according to a report by Grant Thornton. Grant Thornton Eastern
Cape Managing Partner Tony Balshaw said, "There has been a shift in
corporate thinking with regard to BEE. Ownership is no longer the
foremost element in the BEE scorecard. There is stronger emphasis
on skills development." Balshaw said that businesses are now
developing people internally and fast-tracking key employees as
their preferred BEE strategy. "Businesses have realized that to
achieve their BEE goals, they must place stronger emphasis on
recruiting the right people and developing them, rather than
focusing only on equity ownership." The study was conducted
recently among 300 privately held business with 100 to 400
employees. (Business Day, April 24.)
Qemployees. (Business Day, April 24.)

SA Scours the World for Skills
7. (U) The Department of Home Affairs (DHA) has launched a pilot
project with large companies to recruit skilled specialists from
abroad to address South Africa's skills crisis. Due to the global
shortage of skilled workers, DHA has developed the Large Account
program to pave the way for large companies that are in dire need of
specialized skills. An analyst at Deloitte Global Employer Services
said it was "refreshing to see the SAG step up to the plate of
actually building 'scaffolding' to address the skills shortage so
extensively identified in the Accelerated and Shared Growth
Initiative for SA (ASGISA) and the Joint Initiative on Priority
Skills Acquisition (JIPSA) initiatives." DHA tested the feasibility
of establishing a separate department to process immigration
applications for companies which process large amounts of scarce
skills. Four companies were initially used in the first-stage pilot
project between July and October 2007. The project is now entering
the second phase, where an additional 20 companies are to be
selected for involvement in the process. (Business Day, April 23,

PRETORIA 00000881 003.2 OF 004

Business Calls on Regulator to Delay Eskom Tariff Hearing
8. (U) Business Unity South Africa (BUSA) has written to the
National Energy Regulator of SA (NERSA) calling for it to abandon
its current accelerated review of state power supplier Eskom's
request for a nominal 60% tariff increase to give stakeholders
sufficient time to compile comprehensive responses. BUSA CEO Jerry
Vilakazi called for greater transparency from the utility, as well
as from government, which has come out in support for Eskom's
application. "We accept that current prices are not sustainable and
will have to rise," Vilakazi said, but he stressed that BUSA was
strongly opposed to the quantum and timing of the proposed increase,
coming on top of an approved more modest increase that began on
April 1. The ANC National Working Committee agreed earlier this
week that the application process should proceed, after previously
calling for a halt to the public-participation process being run by
NERSA on the rate increase application. A Business Day editorial
recognized the difficulty in NERSA's task whose decision will
inevitably be controversial and politicized. The editorial
applauded the government's and the ANC's recent decision to convene
an energy summit to coordinate responses to the power crisis and
seek a broader consensus on the way forward. The editorial worries
that efforts to tackle the crisis are already being overwhelmed by
process, citing the multiple forums and task teams, of which the
National Electricity Response Team is only one. (Business Day,
Engineering News. April 24, 2008)
Beware Sarkozy's Cozy Deals
9. (U) Two Noseweek editorials took a negative stance towards Areva
and France, claiming the country is often seen as using Africa as a
dumping ground for nuclear waste and that France is not viewed
positively by the African Union as a result of its colonial history
in Africa. Areva and Westinghouse are short-listed for tenders for
up to 20,000 MW and an estimated $70-80 billion for new build
nuclear power stations over the next twenty years. The articles
cited alleged bribes to Areva officials related to other
transactions and European involvement in corruption related to arms
deals in South Africa. The articles noted that South Africa is a
founding member of the African Union and signatory to the New
Economic Partnership for African Development (NEPAD) which oblige
the SAG to ban deals with companies convicted of or incriminated by
corruption. (Noseweek investigative magazine, April, 2008)
Gauteng's Digital Dream Project Criticized

10. (U) IT companies criticized Gauteng provincial government's
plans to build Gauteng Link, a province-wide telecommunications
network, at a cost of up to R35 billion ($4.5 billion). The project
requires the approval of the national cabinet and is expected to be
completed by 2010. The intention is to build a high-capacity
network to bridge the "digital divide", reduce communication costs
(especially for broadband access), and give citizens access to an
Q(especially for broadband access), and give citizens access to an
array of online government services. The project involves big
investments by the provincial government and municipalities, but
will also rely on the support of the private sector. However, the
undertaking is already coming under fire from the private sector,
with one telecom industry executive labeling it a "waste of money".
Gauteng wants to spend more on this project than Telkom rival Neotel
will spend in the next decade on its entire national network
deployment. Sources in the private sector question whether the
project will get off the ground. They indicated that the National
Treasury would block funding in the same way it has questioned other
planned telecom investments by state-owned companies Sentech and
Broadband InfraCo. Gauteng Shared Service Center Chief Information
Officer Lemmy Chappie said Gauteng Link will be run as a
public-private partnership. Gauteng's three biggest municipalities
have thousands of kilometers of fiber-optic cable in the ground, but
infrastructure is barely developed in outlying areas. Chappie said
Gauteng Link plans to bridge gaps in existing infrastructure and
extend the network to lesser-served parts of the province since
commercial telecom operators such as Telkom have shown an
unwillingness to provide services in economically depressed areas.
The press described the funding plan as sketchy, but noted that the
government may raise debt to build the network. Access to the
network will be subsidized for consumers but it won't be free. A
special investment vehicle, the Gauteng Fund, will be used to
finance the network. The provincial government has already

PRETORIA 00000881 004.2 OF 004

contributed R500 million ($65 million). The fund is expected to
grow rapidly if the cabinet approves the project. Chappie said,
"The distribution network will be operated by different companies
that will provide last-mile services to citizens, creating jobs and
ensuring the economy grows." Chappie also hoped to work closely
with Sentech, which is preparing SA for the switch from analogue to
digital terrestrial broadcasting. Chappie said consumers could use
the digital decoders required for digital TV viewing to also receive
Internet signals, thereby turning people's TV sets into Internet
terminals. In an environment where many people can not afford a
computer, he thought this would be a good way to get people hooked
up to the Internet. (Financial Mail, April 11, 2008)

HP Predicts Exploding IT Growth

11. (U) Hewlett-Packard said it saw Africa as one of its
fastest-growing markets, expecting the world's poorest continent to
rival India for IT outsourcing within a decade. Hewlett-Packard
Africa Managing Director Rainer Koch told Reuters its sales on the
continent were rising 25% per year. He expected that pace to
continue regardless of any economic downturn in developed economies,
with growth in the sector likely outpacing that in India, albeit
from a lower base. "Because of outsourcing, salaries in India are
skyrocketing so I think you will see people recruiting in Africa
accordingly. Koch thought Africa would be competing with India in
10 years. He said key to new growth in Africa was the colossal
growth in mobile phone usage since 2000, revolutionizing access to
communication and ease of business at the same time as a commodity
price boom benefited a string of countries. Koch said the firm
currently employed around 1,000 people across Africa including
outsourcing centers, with local partner firms employing several
thousand more -- but that could increase by 20 to 30% in the next
few years. (Engineering News, April 22, 2008)


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