Cablegate: South Africa Economic News Weekly Newsletter May 23, 2008

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1. (U) Summary. This is Volume 8, issue 21 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Finance Minister Defends Inflation Targeting
- JSE Rebounds
- Crime Leading Factor in Emigration
- Imported Skills 'Add 15% to SA Project Costs'
- SA Household Debt Exceeds R1 trillion
- AGOA Drives Vehicle Exports to the U.S.
- Commuter Rail Investments on the Rise
- DOT Proposes Aviation Accident Investigation Agency
- Regulator Recommends that an Independent Entity Manage Private
Power Procurement
- DME Considers Restricting Coal Exports
- Neotel Launches Competitive Packages
- Premier Outlines KwaZulu-Natal Economic Development Plan
- Tourism Suffers from Outbreak of Violence
- PSSA Reviews Medical Waste Disposal
End Summary.
Finance Minister Defends Inflation Targeting
2. (U) Finance Minister Trevor Manuel once again joined the Reserve
Bank Governor in defense of inflation targeting in his address to
the Parliament Finance Committee. Manuel defended inflation
targeting as an economic management tool and hinted that the
government was still comfortable with a 3-6% target range for the
main CPIX gauge. Manuel said "that given the peculiarities of SA, a
country with low savings, low reserve as a measure, inflation
targeting is without its equal." A shift from current economic
policy is doubtful until the change in government next year. (ABSA
Morning Brief, May 21, 2008.)

JSE Rebounds
3. (U) The Johannesburg Stock Exchange (JSE) leapt to a new record
on May 19, buoyed by a surge in global appetite for emerging
markets, along with rallying metals prices. The all-share index
rose 1.5% to a record of 33,191, in step with the strongest recovery
in global equities in four years. "Global markets changed their
minds about risk a week ago. Emerging markets and high yields are
now the flavor of the day," said Citigroup senior dealer Julian
Wilson. "Foreigners are picking up a basket of emerging markets and
the rand is on their list." (Business Day, May 20, 2008).
Crime Leading Factor in Emigration
4. (U) Crime was the most frequently cited reason for professionals
to leave, according to a survey released by Grant Thornton. More
than 80% of those surveyed cited the high crime rate as a
consideration for leaving SA permanently. No other factor received
as many mentions. The survey was conducted among 300 privately held
businesses with 100 to 400 employees. Other factors prompting
emigration included uncertainty about the future leadership of SA
(15%), better business opportunities elsewhere (14%), race
discrimination (13%), education (10%), and health care (10%). In
2008, 72% of the business executives reported that employees or
their relatives had been affected by violent crime, down from 84% in
the 2007 survey. (Business Day, May 14, 2008)
Imported Skills 'Add 15% to SA Project Costs'
Q-------------------------------------------- -
5. (U) Council for the Built Environment CEO Bheki Zulu told a built
environment symposium that the recruitment of foreign engineers to
implement infrastructure projects is adding as much as 15% to the
cost of projects as the global scramble for these skills has seen
demand far outstrip supply. "This shortage could certainly slow the
roll-out of projects, and is also increasing the cost of that
roll-out as many of these skills have to be imported", Zulu said.
Zulu said that according to a recent skills audit conducted by the
council, there were not enough skills entering the system while a
lot of skills were being lost. Murray & Roberts CEO Brian Bruce
said because many of these skills have to be brought from outside
and because there is high demand for them globally, they come here
at a premium. Bruce said experienced people from other countries
are also unwilling to come to South Africa because of the negativity
the country has been getting, especially as a result of crime and

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the recent xenophobic attacks. (Business Day, May 16, 2008)
SA Household Debt Exceeds R1 trillion

6. (U) The National Credit Regulator (NCR) reported that credit
extension to households increased from R289.8 billion ($38.6
billion) in 2002 to R1.1 trillion ($147.7 billion) this year (do you
mean in 2007 or in May 2008?). Mortgages accounted for more than
50% of the debt. Other credit classes, including overdrafts,
leases, installment sales and credit cards made up the balance.
SA's credit market is estimated at about R2 trillion ($266.7
billion). NCR CEO Gabriel Davel said 300,000 "over-indebted
households" were saddled with a R30 billion ($4 billion) debt
burden, while 1 million "debt-stressed" South Africans owed more
than R50 billion ($6.7 billion). Amounts in arrears continued to
swell as interest rates rose. The NCR has registered 360
debt-counselors to help over-indebted South Africans reschedule
their debts. To date, NCR had received 12,000 applications for debt
counseling involving about R2.5 billion ($0.3 billion). (Business
Day, May 22, 2008)

AGOA Drives Vehicle Exports to the U.S.
7. (U) International car manufacturers that base operations in SA
are benefiting from the U.S. African Growth and Opportunity Act
(AGOA), which allows certain categories of exports to enter the U.S.
duty-free. Motor vehicle exports from SA to the U.S. surged 226% in
the first three months of 2008. Figures show that the U.S. imported
$375 million worth of motor vehicles from South Africa between
January and March, compared with $115 million in 2007. National
Association of Automobile Manufacturers of South Africa Executive
Director Nico Vermeulen said BMW SA is a top exporter, including to
the U.S. The company has introduced a new C-class model, after
phasing out its old C-class model last year. The local operation
has ramped up production, exporting 8,000 vehicles worldwide in the
first four months (a fivefold increase over 2007). The cars are
allowed into the U.S. duty-free under AGOA. Motor vehicles, along
with other automotive manufactures, have made transport equipment
the second-largest category of local exports to the U.S., after
metals and minerals. In the first three months of 2008, transport
exports were worth $423.9 million, up from $169 million last year.
This is still a big dip from $664.9 million in 2006. Vermeulen
suggested that the decrease came after the closure of BMW's old
C-class model and ahead of the introduction of its new model. The
balance of trade in this category lies with the U.S., which exported
$544 million worth of transport equipment to SA, compared with
$344.4 million a year earlier. (Business Report, May 20, 2008)
Commuter Rail Investments on the Rise
8. (U) The South African Rail Commuter Corporation (SARRC) is
investing about R18 billion ($2.4 billion) in upgrading its rail
infrastructure, according to CEO Lucky Montana. "Our intervention
Qinvolves a stabilizing phase and, by 2010, we want to restore rail
services to their 1992 status and, thereafter, we will build new
lines and expand our capacity." SARRC is "currently upgrading 200
coaches and has set aside about R7 billion ($933 million) to
intensify maintenance of the 40-year-old fleet to increase its
ability to meet safety requirements," he said at the Eastern Cape
Rail Conference. Montana noted that the company had increased its
passenger volume by 12%, but stated that the cost of R50 million
($6.7 million) per kilometer in rail repairs was proving to be a
critical constraint. He pointed out that the current transport
system was a product of apartheid when issues of comfort and safety
were overlooked. Montana said "over 70% of South Africa's
households do not have access to a car and we need to find a
solution that is accessible." (Engineering News, May 16, 2008)
--------------------------------------------- ------
DOT Proposes Aviation Accident Investigation Agency
--------------------------------------------- ------
9. (U) The SA Department of Transport (DOT) released a proposal to
create an independent Aviation Accident Investigation Agency. The
establishment of the state-funded agency, which would act
independently from the SA Civil Aviation Authority, is mooted in the
DOT's 2008 Civil Aviation Bill. The bill is currently out for
industry comment, after which it will be passed to parliament for
enactment. Under current regulation, the Minister of Transport

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appoints an ad hoc Accident Inquiry Board to investigate accidents.
According to the proposed legislation, the new agency would be
composed of a full-time chairman and two part-time members. They
would be appointed for a renewable term of three-years by the
Minister of Transport following public nominations. The functions
of the agency would be to investigate aircraft accidents and
incidents; make safety recommendations; submit a final report on its
findings to the minister and all stakeholders within three months of
the completion of an investigation; and to implement safety
recommendations. It would have the power to institute or defend
legal actions; reopen investigations; establish an aircraft accident
and incident reporting system to detect safety deficiencies; and
conduct investigations on behalf of other states. (Travel News
Weekly, May 14, 2008)
--------------------------------------------- ---------
Regulator Recommends that an Independent Entity Manage Private
Power Procurement
--------------------------------------------- ---------

10. (U) The National Energy Regulator of South Africa (NERSA)
released a report asserting that state-owned Eskom should not manage
and coordinate the procurement of private power generation. Instead
it recommended that a "centralized high-level government unit"
should coordinate the national electricity emergency program,
including the power conservation program. According to NERSA, "this
unit should have "authority to take action". Meanwhile, the
regulator also said in its report that the SAG needed to develop a
national strategy for the acquisition and management of coal to
ensure supply security. This came after Eskom found itself in
serious trouble in January, when it declared a "force majeure" with
its biggest industrial customers, leading to most of the country's
underground mines closing for five days. Eskom blamed much of the
problem on poor coal supplies, and the heavy rains that had created
wet coal, which did not burn well. "National government should
consider formulating a policy that will balance Eskom's commercial
decisions and the national security of electricity supply in order
to avoid national crises," stated NERSA. "The role of Eskom in
government's national electricity emergency program should be
clarified considering that Eskom has to focus on, among others,
returning the system to normality." NERSA said it believed that the
implementation of these recommendations would contribute towards
mitigating the electricity supply shortage, as well as reduce the
adverse impact thereof. (Engineering News, May 19, 2008)

DME Considers Restricting Coal Exports

11. (U) The Department of Minerals and Energy (DME) spokeperson
Bheki Khumalo revealed that Minister Buyelwa Sonjica had
commissioned a study into the management of local "strategic coal
resources". "There is a serious need to take a look at the
country's coal policy," Khumalo said, speaking in the light of a new
National Energy Regulator of SA (NERSA) report, which highlighted
Eskom's problems. One option might be to restrict coal exports
QEskom's problems. One option might be to restrict coal exports
mainly through Richards Bay, Khumalo added. NERSA Head of
Electricity Regulation Thembani Bukula said the regulator wanted
low-grade coal exports, which were mainly for export to India, to be
limited. A Wood Mackenzie analyst said it would not make any
difference to Eskom's coal supply position if exports of coal were
diverted to the utility. "Stopping coal exports would create havoc
in the local coal market, especially among empowerment companies
that have just entered the export market." Analysts add that
diverting coal from exports would be illegal. An industry source,
who wished to remain anonymous, said the SAG could face legal action
from the coal mining industry or its export customers if it
unilaterally diverted exports. Eskom has missed its own target for
increasing coal stocks to a minimum of 20 days of supply by the end
of April, raising the risk of power cuts during winter. Bloomberg
reported that Eskom's coal stocks were at 16.2 days last week after
dropping below 10 days in January. Anglo spokesperson Pranill
Ramchander did not expect the government investigation to have any
effect on the group's coal exports. "We have export contracts in
place that are binding." he said. (Business Day, May 14, 2008.)

Neotel Launches Competitive Packages

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12. (U) Emerging telecoms provider Neotel unveiled its long-awaited
consumer offering. CEO Ajay Pandey revealed that the company hoped
to connect between 50,000 and 60,000 customers over the next nine
months. Neotel hoped to accelerate its network expansion beyond the
current geographic coverage area, which was restricted to parts of
Johannesburg and Pretoria. Five "converged" packages, branded
NeoConnect, combine voice and data services, and range in price from
R299 ($40) a month for the "entry level" product, through to R999
($133) a month for a high-end solution. The top-end product
incorporates 2,000 free network minutes (Neotel-to-Neotel calls),
120 free local and regional calls to Telkom customers, as well as
text messaging, high-speed Internet and e-mail. Industry analysts
asserted that the Neotel voice and internet offerings could place
downward pressure on telecommunication rates. Frost & Sullivan
Telecoms Analyst Lindsey McDonald said she was impressed at how well
the offering had been "bundled". "Despite the costs still being
fairly prohibitive in terms of universal access, I still think the
way the offering has been structured is going to place serious
pressure on Telkom for the first time," McDonlad added. She
attributed this to the market research undertaken ahead of the
launch. Pandey insisted that extending coverage was a major
priority and that it would soon have a presence in Cape Town,
Durban, and Soweto. Bloemfontein, East London, Kimberley, and Port
Elizabeth were likely to follow. Neotel would also be able to offer
increasingly competitively priced international services once new
capacity is obtained from the SEACOM and SAT-3 projects underway,
which will increase African IT links to Europe. Neotel planned to
spend some R11 billion ($1.5 billion) to upgrade its network
incrementally over the next decade. (Engineering News, May 22,

Premier Outlines KwaZulu-Natal Economic
Development Plan

13. (U) KwaZulu-Natal (KZN) Premier Sibusiso Ndebele stated that the
province's economic development strategy aimed to transform the
structure of the provincial economy, to increase investment, to
build skills and capacity, to broaden participation in the economy,
and increase competitiveness. The gross domestic product of the
KwaZulu-Natal region is now the second-largest in the country, after
Gauteng. Ndebele added that the economic development program was
vital to a society that was undergoing rapid change and having to
adjust to new challenges. "The government needs to create
conditions for interdependence and interconnectedness," he stated.
Ndebele said that in order to increase the collective impact and
synergy of government interventions in pursuit of the reduction of
poverty, it was critical to improve the spatial alignment and
integration of resource allocation. For example, the provincial
spatial economic development strategy (PSEDS) database provided a
mechanism to capture and reflect all capital projects spatially over
the medium-term expenditure framework period, while the provincial
nerve centre was being used to obtain a single view of the province.
Qnerve centre was being used to obtain a single view of the province.
"The PSEDS database and the provincial nerve centre are being used
as up-to-date technology systems to assist the provincial government
in developmental decisions," Ndebele stated. A KZN growth fund
provided medium to long-term funding for sustainable infrastructure
and related projects within the province. He noted that the fund's
investment committee had approved projects with an estimated value
of R414 million ($55 million) spread across sectors such as
manufacturing, transportation and logistics, and agricultural
processing. Ndebele said the investment was set to yield an
estimated 863 new jobs. About 40% of these projects were in
outlying areas within the province and, through 12 approved
projects, the fund had been able to promote significant black
economic participation as a strategic imperative. On the issue of
local economic development, Ndebele said that just over R95 million
($13 million) in grants had been committed to 182 projects across
the province. In the past eight months, 14 projects had been
completed. A further 23 projects, valued at R70 million ($9.3
million), are in the pipeline for European Union funding approval.
(Engineering News, May 16, 2008)

Tourism Suffers from Outbreak of Violence

14. (U) The outbreak of xenophobic violence in Gauteng is sowing

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panic in the tourism industry - and is being blamed for a large
number of delegates from other African countries pulling out of a
top business conference in Cape Town at the last minute. The German
Foreign Ministry has issued a warning to visitors to avoid central
Johannesburg and the outlying townships. It advised against all
trips to these areas, whether by tour groups or individuals. These
are just some of the immediate knock-on effects of the week of
violence that has left 42 people dead, scores injured and thousands
of people displaced. In Cape Town, the conference of the Leading
Women of Africa Forum got under way this week with only 160 of the
250 invited delegates. According to organizer Madelein Mkunu, the
event "lost delegates from countries such as Nigeria, Guinea,
Cameroon and Burkina Faso. "They had confirmed they would come to
this wonderful business opportunity forum, only to send me e-mails
saying that due to xenophobic attacks 'we cannot come'." The
Tourism Business Council of SA CEO Mmatsatsi Marobe said the image
of the country reflected in the media was having a "detrimental
effect" on the tourism industry. "Certain sections of the travel
and tourism sector are already fielding panic calls from partners in
SA's major tourist source markets - something that could reverse the
major gains made at the travel and tourism indaba held in Durban
recently," Marobe said. (Engineering News, May 16, 2008 and
Business Day, May 16, 2008)


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