Cablegate: South Africa Economic News Weekly Newsletter May 30, 2008

DE RUEHSA #1146/01 1510849
R 300849Z MAY 08




E.O. 12958: N/A

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1. (U) Summary. This is Volume 8, issue 22 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Economic Growth Slows
- Large Rate Hike Looms as Inflation Hits 10.4%
- 2000 Foreign Math and Science Teachers Head for SA
- SAA Reaches Salary Agreement with Pilots
- PetroSA Mulls Challenge to Transnet Pipeline
- Power Tariff Smoothing Prevailing
- Xenophobia Affects Mine Production
- Union Calls for Nationalization of Mines
- Indian Company Considers MTN Merger
- ICASA Rejects Bid to Force Pay-TV Providers to Pay for Public
Broadcaster's Content
- Cape Town Builds Five-Star "Dry" Hotel
- Xenophobia Impacts Provincial Tourism
End Summary.
Economic Growth Slows
2. (U) Statistics South Africa (StatsSA) reported that growth in
gross domestic product (GDP) slowed from 5.3% in the fourth quarter
of 2007 to 2.1% in the first quarter of 2008, below forecasts of
2.4%. Mining output, which makes up 5.4% of GDP, decreased 22.1%
compared with the final quarter of 2007, its sharpest fall in four
decades. Manufacturing output, which accounts for more than 16% of
GDP, dipped 1%. The electricity, gas and water sector contracted
6.2% in the first quarter, reflecting the inability of power utility
Eskom to meet rising demand. The rising cost of credit knocked
growth in financial services, the economy's biggest sector, down
from 8.5% in the fourth quarter of 2007 to 4.9% in the first quarter
of 2008. The star performer of the economy was the construction
sector, which rocketed 14.9% in the first quarter, reflecting the
launch of a large official infrastructure spending program over the
next few years. Agriculture increased 12.5% from the previous
quarter, in response to higher crop harvests, spurred partly by the
continuing surge in food prices. Economists attributed the slowdown
in economic growth primarily to the power outages that led to a
sharp contraction in mining output and curbed activity in the key
manufacturing sector, as well as the rising cost of credit which
affected growth in financial services. However, analysts felt that
it is unlikely that the disappointing GDP growth figures would
convince the South African Reserve Bank (SARB) not to increase
interest rates at its policy meeting next month, because of soaring
inflation. Chamber of Mines Chief Economist Roger Baxter warned
that growth prospects for mining and other major industries were
likely to remain "constrained" by power limitations during the rest
of the year. "This is worrying as mining accounted for more than
half of SA's exports", he said. Economists predict that growth will
slow to between 3.0% and 4.0% this year, from an average pace of 5%
over each of the past four years. (Business Day, May 28, 2008)

Large Rate Hike Looms as Inflation Hits 10.4%
3. (U) South African Reserve Bank (SARB) Governor Tito Mboweni
warned that interest rates may rise by up to two percentage points
at the SARB's policy meeting next month, after news that inflation
Qat the SARB's policy meeting next month, after news that inflation
had accelerated to a new five-year peak in April 2008. Statistics
South Africa (StatsSA) data showed that the annual rise in the CPIX
inflation increased from 10.1% in March to 10.4% in April, the 13th
month in a row that CPIX has breached the 3%-6% official target
range. "I'm speechless," said Brait Economist Colen Garrow after
the CPIX data was released. "We've got a classic case of stagflation
... rising inflation, lower growth and high unemployment."
Government bonds slid and banking shares fell 1.9% as markets
reacted to fears that interest rates will rise more sharply than
expected this year, as electricity tariff hikes and wage rises add
to upward pressure on prices. "You don't have to be a genius to
tell that interest rates have to tighten ... with CPIX at 10.4%,
drastic measures are required," Mboweni said. The SARB has raised
lending rates by 4.5 percentage points since June 2006 in a bid to
ease spreading price pressures, sparked by the soaring global cost
of food and fuel. That has pushed debt costs sharply up, curbing
consumer spending and helping to slow economic growth. (Business
Day, May 29, 2008)
--------------------------------------------- -----
2000 Foreign Math and Science Teachers Head for SA

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--------------------------------------------- -----
4. (U) Department of Education (DOE) Deputy Director General Firoz
Patel told the National Assembly's portfolio committee on education
that his department will employ 2,000 foreign math and science (M&S)
teachers in the next two years. Patel said there was a critical
shortage of skills in M&S teaching in SA and DOE still had to
address the issue of under-qualified teachers. He said DOE already
has 1,432 foreign teachers working in local schools, and has
received enquiries about employment from Asia and the U.S. The
program will run for three years, with the first 1,000 group of
teachers arriving in October 2008. The Department of Home Affairs
has allocated 4,000 permits for the anticipated teachers. In an
effort to increase interest in M&S teaching, DOE has allocated R500
million ($66.6 million) in incentives for teachers. It has also
established a four-year bursary fund for teacher training programs.
DOE is aiming to address the issue of under-qualified teachers by
2013. (Pretoria News, May 28, 2008)
SAA Reaches Salary Agreement with Pilots
5. (U) National carrier South African Airways (SAA) announced that
it has reached salary and restructuring agreements with its pilots
that would facilitate greater labor stability and assist the airline
with its return to sustainable profitability. The airline and the
pilots union agreed to a three-year salary agreement, as well as a
restructuring agreement. This follows a multi-year wage agreement
reached earlier in May with trade unions representing cabin crew and
ground staff. "Reaching an agreement with our pilots will assist us
immensely with our plans to expand our fleet and to explore
opportunities for growth. We can now as a team focus on
consolidating the airline's restructuring program, as well as
growing the business," said CEO Khaya Ngqula. The parties have
agreed to use a local market-based formula for salary increases for
2008/9 and 2009/10. A study will be conducted to benchmark salary
increases to comparable job categories in SA. SAA also said that it
had suspended its Maintenance of Parity agreement and temporarily
replaced it with the three year-salary agreement. (Business Report,
May 20, 2008)
PetroSA Mulls Challenge to Transnet Pipeline

6. (U) State-owned logistics company Transnet's new R11.2 billion
($1.45 billion) fuel pipeline from the Port of Durban could get a
competitor if state-owned oil and gas company PetroSA proceeds with
its plans for a similar venture. PetroSA announced that it was
studying the feasibility of an alternative pipeline from the new
port in Coega to Gauteng. PetroSA Vice-President Joern Falbe said
the study was expected to be completed by the end of 2008.
"Technically it would be possible to have the pipeline up and
running by 2014 - in seven years time," he said without disclosing
the expected cost and capacity of the pipeline. Transnet announced
earlier that its new pipeline was expected to begin pumping fuel
Qearlier that its new pipeline was expected to begin pumping fuel
during the third quarter of 2010. News of the possible additional
pipeline came as PetroSA said that it had increased the capacity of
its proposed Coega oil refinery by 60% to 400,000 barrels a day and
at a cost of $11 billion. SA's six refineries can process up to
708,000 barrels a day. Expanding the planned size of the PetroSA
refinery comes at a time of growing demand for fuel in the local
economy, which has resulted in shortages and greater imports. Power
shortages have resulted in greater demand for diesel. PetroSA said
the increase in the planned size of the refinery came thanks to
input from potential international partners who recognized the
flexibility of Coega to supply diverse markets and mitigate risk.
After evaluating all operational, logistical and environmental
considerations, 400,000 barrels a day was considered to be the most
suitable configuration, Falbe said. "Due to the economies of scale,
the investment cost per barrel reduces by 20% and operating costs
improve by 30%, boosting the original project economics
substantially," he added. The proposed refinery, which PetroSA said
would be the lowest-cost producer in sub-Saharan Africa, was
expected to start operating by 2014, when South Africa's demand for
refined oil is expected to exceed existing refining capacity by
about 200,000 barrels a day. In the absence of a new refinery, SA
would have had to import the shortfall, a more expensive solution
because it would drain the country's foreign exchange reserves.
(Business Report, May 23, 2008)


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Power Tariff Smoothing Prevailing
7. (U) The consensus of speakers at the National Energy Regulator of
SA (NERSA) May 23-27 hearings into Eskom's application for a 60%
tariff increase supported a smoothed, or more gradual, five-year
approach to increasing electricity prices. The tariff smoothing
approach and safeguards for the poor and continued economic growth
were also the consensus from the May 16 National Energy Summit. The
five-year smoothing suggestion appeared to trigger an announcement
by international ratings agency Moody's that it might cut Eskom's
credit rating. Moody's issued a statement: "The action reflects
Moody's concerns over the potential negative effects of possible
less-than-expected tariff increases on Eskom's financial profile and
that government support for Eskom may not be as clear and as
unambiguous as reflected in Moody's current high-support
assumption." Standard & Poor's previously placed Eskom on so-called
negative watch for the same reasons. At the hearings, Chamber of
Mines Chief Economist Roger Baxter described the government's
commitment of $9 billion to Eskom as a "capital injection" and a
clear sign of the government's support for the 100% government-owned
entity. Another outcome of the National Energy Summit was
commitment to create an electricity advisory council of government,
business, labor, and community representatives to advise government
and Eskom on how the utility could meet its funding requirements for
about $50 billion in its five-year build program. Embattled Eskom
Chairman Valli Moosa broke his controversial silence, rejecting
NERSA's assertion that Eskom management had been pre-occupied with
profitability at the expense of safeguarding supply security. Moosa
also blamed South Africa's affluent homeowners for using energy
inefficiently. (Engineering News and Business Day May 22-27, 2008)
Xenophobia Affects Mine Production
8. (U) Mid-tier gold-miner DRDGold reported that worker attendance
at its ERPM mine near Boksburg was back to normal, after a week of
erratic turnouts cut production. A company spokesperson said
violent outbreaks in informal settlements that targeted foreigners
"seemed to have calmed down", and production should soon be at
normal levels. One-third of ERPM's workforce are citizens of
neighboring countries, mainly Mozambique. DRDGold previously
announced that two of its workers had been killed in the mob
brutality that swept through Gauteng's squatter camps before
spreading to other provinces. The National Union of Mineworkers
condemned the violent attacks on foreigners, describing them as a
"disgrace to our revolution". A separate article quoted a local
mine worker speaking to ANC President Jacob Zuma: "The reason the
Mozambicans were targeted was because bosses put them in charge over
us at work. This is because every time the white man says 'Do
this', the Shangaan (Mozambican) says, 'Yes baas!'" Note: Mine
management has reported that Mozambicans have a reputation for
talent and intelligence as team managers. (Engineering News and The
Qtalent and intelligence as team managers. (Engineering News and The
Times, May 26, 2008)
Union Calls for Nationalization of Mines
9. (U) South Africa's largest mineworkers union, the National Union
of Mineworkers (NUM) called for the nationalization of the country's
mines as a way of dealing with the country's energy crisis.
Speaking at the union's central committee meeting, NUM President
Senzeni Zokwana said, "if the government was concerned about the
high cost of coal and the high fuel costs, it should nationalize
mines and turn coal-to-liquids provider Sasol into a state-owned
entity. In February, the ruling ANC's Secretary-General Gwede
Matashe said the country had to create more state-owned enterprises
in the mining industry. He particularly highlighted the platinum
industry. (Mining Weekly, May 23, 2008)
Indian Company Considers MTN Merger

10. (U) MTN Group has started talks with Indian mobile-operator
Reliance Communications that could lead to the creation of a $66
billion emerging markets telecom group. Reliance, India's number
two mobile-operator, quickly stepped into the void after bigger
rival Bharti Airtel pulled out of talks with MTN. A combination of
MTN (valued at $38 billion) and Reliance (valued at $28 billion),
would create a top-ten global industry player. In terms of
subscribers, a merged group would slot in just below Deutsche
Telekom, as the seventh largest in the world. Reliance recently

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bought Ugandan Anupam Global Soft, stating it would launch mobile
services in Uganda by the end of 2008 and spend up to $500 million
over five-years to build a telecom network there. Analysts said
Reliance and MTN might swap shares, as the foreign holding in
Reliance Communications was considerably lower than in Bharti
Airtel, a factor that was seen as a possible roadblock for Bharti's
attempted deal. Foreign ownership of Indian telecom firms is capped
at 74%, and Singapore Telecommunications already owned a 30.5% share
of Bharti. Media and industry analysts had speculated that Bharti
was eyeing a 51% stake in MTN. MTN is seeking new markets outside
Africa and the Middle East and will likely push to retain its brand
and culture. Reliance and MTN said that the two groups had entered
into exclusive talks about combining their businesses. A 45-day
exclusivity period will be in force, during which neither can talk
to any other entity. Reliance Chairman Anil Ambani, one of India's
richest men, said a deal with MTN could "provide investors,
customers and the people of both companies a global platform for
exponential growth". "Reliance Communications is smaller than MTN,
and lacks the financial muscle for a takeover, but it is not going
to want to be a subsidiary, either," said a telecom analyst. The
two firms were instead likely to create a new company, with MTN
taking a 51% stake. (Business Report, May 28, 2008 and Engineering
News, May 26, 2008)

--------------------------------------------- -----
ICASA Rejects Bid to Force Pay-TV Providers to Pay for Public
Broadcaster's Content
--------------------------------------------- -----

11. (U) The Independent Communications Authority of SA (ICASA) has
rejected the South African Broadcasting Company's (SABC) bid to
force pay-television providers such as MultiChoice to pay for the
privilege of carrying the public broadcaster's channels. In 2007,
SABC proposed that MultiChoice and new players Telkom Media, Walking
on Water, and On Digital Media should pay for the content of SABC1,
SABC2 and SABC3, saying the channels boosted the uptake of
subscription services in the market. It pressed ICASA to enforce a
"must carry, must pay" policy. The move raised speculation that
SABC was seeking to boost its finances after profit for the 2006/07
financial-year fell 52%. But in draft regulations released this
week, ICASA dismissed the public broadcaster's request and proposed
that every operator must continue carrying its own cost.
MultiChoice carries SABC1, SABC2 and SABC3 without charge. In its
findings, the regulator said "must carry" obligations should not be
imposed as financial support for any broadcaster. The SABC should
offer its channels free of charge and deliver its signals to the
subscription operators at its own cost. Any costs outside the
signal delivery and carriage of the channels should be based on
commercial negotiations between the parties. Under the Electronic
Communications Act, subscription broadcasters must carry the public
service channels to fulfill universal access obligations. During
hearings last year, MultiChoice, On Digital Media, and Telkom Media
Qhearings last year, MultiChoice, On Digital Media, and Telkom Media
argued that they would be helping the SABC to meet its universal
access duties by carrying the channels, because the terrestrial
signal was weak in some areas. Airing the channels to
pay-television consumers boosted the public broadcaster's
negotiating powers with advertisers, MultiChoice added. If ICASA
imposed the "must pay" obligation, MultiChoice cautioned, the costs
might be passed on to consumers, who would be paying twice for
channels as they already had to pay SABC television license fees.
There were also concerns that the SABC might not offer channels such
as SABC3, which it views as a commercial station, if ICASA did not
impose the remuneration obligation. The SABC argued that
subscription broadcasters were obliged to carry its public service
channels, but it was not mandatory for the SABC to offer all of its
content to them. ICASA's draft stated that SABC would have to make
its channels available to all the players on a non-discriminatory
basis. (Business Report, May 29, 2008)

Cape Town Builds Five-Star "Dry" Hotel

12. (U) A new five-star "dry" hotel aimed at the Middle Eastern
market is being built in central Cape Town at a cost of R220 million
($29 million). Pam Golding Properties is marketing 30 of the 140
hotel rooms and suites in the Coral International Hotel. The hotel
is being built in Bokaap, an area with strong historical Muslim
links. Pam Golding Area Manager Basil Moraitis said construction

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began at the beginning of May and should be completed by the end of
2009. Moraitis said one of the largest suites had been bought by a
member of an Emirates royal family, Sheikh Faisal Bin Sultan Al
Qasimi from the ruling family of Sharjah. Moraitis said the
developers wanted to create a hotel that appealed to Middle Eastern
visitors and businessmen and was being built to the "highest
standards with prayer rooms". The luxury hotel will include a
fitness center, meeting rooms, conference facilities and three
different restaurants that will serve food according to Muslim
dietary restrictions (halaal). (Business Day, May 26, 2008)

Xenophobia Impacts Provincial Tourism

13. (U) Tourism KwaZulu-Natal (TKZN) CEO Ndabo Khoza held a press
conference in Durban on May 27 to condemn xenophobic violence and
outline steps to curb the negative impact on tourism in KZN. Khoza
noted that Africa is SA's most important source of foreign visitors
and tourism income. He added that "in terms of spending per trip by
international tourists in 2006, visitors from Mozambique topped the
list, each spending R21,000 ($2,700)." Spending by tourists from
Angola ($1,660), India ($1,500), Nigeria ($1,480), and U.S. ($1,430)
rounded out the top-five list. TKZN Chairman Seshi Chonco said that
"after the domestic tourism market, Africa was the province's most
important source of tourists." The African market accounts for 67%
(6.8 million) of foreign visitors and generates as much as R4
billion ($519 million) a year in revenues. Chonco described
"overnight tourists" from neighboring towns in Swaziland,
Mozambique, and Lesotho, who come into SA on short shopping trips,
as the bread and butter for the KZN border towns and thought the
xenophobic incidents put that at risk. Khoza and Chonco hoped to
send a positive message to nurture the "valuable African tourism
market." (Mercury, May 28, 2008)


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