Cablegate: South Africa Economic News Weekly Newsletter June 13, 2008

DE RUEHSA #1312/01 1660725
R 140725Z JUN 08




E.O. 12958: N/A

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1. (U) Summary. This is Volume 8, issue 24 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- World Bank Upbeat on SA Economy
- Another Interest Rate Hike
- Current Account Deficit Raises Concern
- Electricity Problems Likely to Harm Economic Growth Objectives
- Banks Tighten Discount Screws on Home Buyers
- Cash Is King as Rate Hikes Sting Shoppers
- World Economic Forum on Africa
- SA Air Force Pilots Jet-Off to Australia
- Delta Optimistic About Africa Expansion
- Airports on Track for 2010, But ACSA Concerned about High
Borrowing Costs
- Guatrain on Track for 2010
- Motor Industry Running on Empty
- Mercedes-Benz SA Expands Truck Range
- Electricity Distribution Maintenance Backlog - Another
Electricity Crisis Looms
- Minister Says Suez Energy Submitted Binding Offer for IPP
- U.S. Gold Miner in SA
- Canadian Business Chamber Flays SA
- Unions Give Telkom Silent Treatment
- Dubai World Plans to Expand in SA
End Summary.

World Bank Upbeat on SA Economy
2. (U) The World Bank expects SA's economy to grow by a robust 4.2%
this year, slightly above official estimates of 4.0% and surpassing
consensus forecasts for a sharp slowdown prompted by higher interest
rates, power shortages and global risk aversion. Consensus
forecasts from a June Reuters poll predicted SA's pace of growth
will slow to 3.4% this year from an average of 5% over each of the
past four years. The World Bank 2008 Global Development Finance
Report author Hans Timmer said rising investment in power plants and
other infrastructure would help offset waning consumer demand and
the bleaker global investment mood. He emphasized that "there is
underlying growth potential in SA and it will continue". Timmer
said household consumption, which accounts for about 60% of SA's
economy, was slowing gradually while investment was rising rapidly.
SA's main investment indicator surged to 20% of gross domestic
product (GDP) last year from 15% in 2000, spurred mainly by capital
investment by state entities. The World Bank sees economic growth
accelerating to 4.4% in 2009 and 4.8% in 2010, also above official
forecasts. (Business Day, June 11, 2008)

Another Interest Rate Hike
3. (U) The SA Reserve Bank's (SARB's) monetary policy committee has
raised its key lending rate, the "repo" rate by 50 basis points to
12%, taking the prime lending rate to 15.5%. The consensus forecast
by 10 leading economists polled by I-Net Bridge was for a
100-basis-point increase in the repo rate. The SARB has already
lifted its repo rate by 500-basis-points since June 2006, by 50
basis points each time. SARB Governor Tito Mboweni said "the
central message is that things are going to get difficult before
they get better. We all need to act responsibly (when spending)."
(Fin24, June 12, 2008)
Current Account Deficit Raises Concern
4. (U) Treasury Director-General Lesetja Kganyago, commented that SA
Q4. (U) Treasury Director-General Lesetja Kganyago, commented that SA
is finding it increasingly difficult to finance its current account
deficit, which reached 7.5% of gross domestic product in the fourth
quarter of 2007. He said global financial market turmoil was
contributing to investors opting for other perceived safer-haven
markets. SA's low savings rates, coupled with rising investment
levels, mean that the country is heavily dependent on foreign
savings to finance the large current account imbalance. The
SAG-led, multi-billion investment program is likely to keep the
current account deficit under pressure over the next few years.
This increasing difficulty in financing the current account deficit
raises the depreciation risk associated with the rand. This week,
the rand lost nearly 1% of its value against the U.S. dollar and

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about 0.3% on a trade-weighted basis on concerns of slower global
growth and the impact of high oil prices on international inflation.
The Treasury is trying to mitigate the currency risk by budgeting
for surpluses over the next few years, stating that the SAG is
"going to have to save" on behalf of South Africans who "love
spending their money". (ABSA Capital Research, June 11, 2008)
Electricity Problems Likely to Harm
Economic Growth Objectives
5. (U) SA Deputy President Phumzile Mlambo-Ngcuka said that the
SAG's socio-economic development goals may be compromised if the
country's electricity problems are not addressed. Although a
tighter monetary policy environment contributed to the growth
slowdown in the first quarter of 2008, the impact of electricity
supply disruptions was clearly noticeable in GDP growth data,
especially in the mining sector. The disruption of mining
operations (mining contracted by 22% q/q) contributed to overall GDP
growth decreasing from an annualized 5.3% q/q in the forth quarter
of 2007 to an annualized 2.1% q/q in the first quarter of 2008.
Moreover, Minerals and Energy Minister Buyelwa Sonjica expects mines
to continue to operate with 90-95% of normal electricity supplies
until supply constraints have been addressed. Economists expect the
electricity supply constraints to pose a significant risk to the
country's medium-term growth prospects. Eskom CEO Jacob Maroga
noted that current planning timelines and budgets are going to be
missed, which may prolong the electricity crisis. Apart from the
electricity supply problems, electricity tariff hikes are likely to
worsen the inflation outlook and add upward pressure on interest
rates. (Eskom applied for a 60% increase in 2008-09 and NERSA,
national energy regulator, is expected to announce a decision on
June 18) (ABSA Newsletter, June 10, 2008)
Banks Tighten Discount Screws on Home Buyers

6. (U) Integer Home Loan Group CEO Simon Stockley said Absa Bank and
First National Bank had changed their credit policies and now
required borrowers to deposit at least 5% of the value of the
property to secure a loan. Stockley added that "banks are not going
to be as aggressive about offering discounts as they may have been
in the past. You are not going to be offered prime minus 2%."
Stockley said this had created a "near storm" in a depressed housing
market, with first-time home owners affected the most. "Consumers
are getting a double raw deal from banks. Not only has the SARB
raised interest rate rise by another 50-basis-points on June 12, but
banks are reducing the discount on the prime lending rate at which
they offer home loans to customers," he said. (Business Day, June
11, 2008)

Cash Is King as Rate Hikes Sting Shoppers
7. (U) The credit binge seems to be over, with consumers turning to
cash instead of credit. Rising food and fuel prices as well as
higher interest rates are putting pressure on disposable incomes,
Qhigher interest rates are putting pressure on disposable incomes,
making it harder for consumers to service their debt, which will
have long-term consequences for credit sales. JD Group Chairman
David Sussman said the furniture retailer saw a decline in credit
sales of 19% accompanied by a 10% rise in cash sales in the
half-year to February 2008 as fuel, food, and interest rates were
still climbing. RMB Asset Management Retail Analyst Evan Walker
said the debt cycle will have a far-reaching effect on retail sales
even when the interest rate cycle turns, as heavily indebted
consumers need at least three years of normal economic growth to
service bad debts. According to clothing retailer Edcon, which owns
Edgars and Jet, credit sales in the year to May slowed, although
total sales rose 8.9%. The group, which has more than 4 million
active credit card accounts, said credit sales accounted for 53% of
total retail sales during 2008, down from 60% in the 2007 financial
year. Walker said a shift to cash sales shows "the brakes are
really coming on". He said the shift to cash was caused by more
people defaulting on in-store credit and fewer people opening credit
accounts. The number of account customers who can spend on credit
is shrinking, causing the ratio to shift to cash. He expects about
12% of SA's total credit population to come under pressure and
default on loans. Consumers are paying off credit, and have learned
discipline as a result of the new credit act, which some view as
having come too late to protect a burgeoning middle-class.

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(Business Day, June 10, 2008)
World Economic Forum on Africa
8. (U) Nearly 900 business, government, and civil society leaders
from 50 countries participated in this year's World Economic Forum
on Africa in Cape Town on June 6. The forum opened with a
brainstorming session where education, food security, robust
infrastructure, economic growth and investment, and visionary
leadership were voted as the top drivers of change. President Mbeki
said, "it is necessary to refashion the education system so that
when young people come up they are better able to join the economy."
Forty leaders from across the continent also launched an Africa
Gender Parity Group. (World Economic Forum Press Release, June 6,
SA Air Force Pilots Jet-Off to Australia
9. (U) The South African Air Force (SAAF) has lost four pilots to
Australia this year - a big loss for a service struggling to
maintain staff and training levels. The Royal Australian Air Force
(RAAF) has also recruited nine other officers with air combat,
administrative and logistical expertise. In addition, the SAAF has
lost two aircraft technicians, a communications technician, and a
clerk from its enlisted ranks to Australia. The RAAF denies charges
that it actively recruits personnel under its "lateral" foreigner
recruitment program. "A RAAF lateral recruiting team will not be
visiting SA," said the Australian Regional Defense Captain Jonathan
Mead. It is unclear which country is the main destination for SA
Defense Force and Air Force personnel, but the departure of trained
personnel is a huge blow. Len le Roux (head of the Institute of
Strategic Studies' Pretoria office and a retired Air Force
Major-General) said, "there are squadrons where there are 20
aircraft and about four or five pilots." SA's armed forces have long
complained about a lack of funding to maintain training levels and
retain staff. The Air Force lost more than 240 highly skilled
aircraft technicians in 2005. The navy is suffering the same
problem. "The Defense Department is indeed concerned with regard to
the loss of skilled personnel," Chief Director of Maritime Strategy
Bernard Teuteberg said. Air forces always struggle to hold onto
pilots in peacetime, Le Roux says. "Government salaries do not
compare with those on the outside. He noted that "a guy flying a
Boeing to England and back twice a week...gets the same salary as
the Chief of the Air Force." The fact that the Australians are
recruiting SA pilots shows they are having trouble hanging onto
their own pilots, Le Roux added. (Business Day, Weekender, June
7-8, 2008)
Delta Optimistic About Africa Expansion

10. (U) Delta Airlines Sales Manager for Southern Africa Margaret
Copeland is optimistic about Delta's expansion strategy in Africa.
Delta started direct service from JFK to Cairo and from JFK (via
Dakar) to Cape Town on June 3. The new service to Cape Town will
leave Cape Town four days a week on Mondays, Wednesdays, Fridays,
Qleave Cape Town four days a week on Mondays, Wednesdays, Fridays,
and Saturdays. Delta plans on adding a second daily flight to Lagos
and starting service to Nairobi (also via Dakar) in June 2009, after
having been postponed a year as a result of the recent violence in
Kenya. The airline is creating a mini-hub in Dakar for its Africa
service. Copeland noted that sales for the Cape Town route were
brisk (about 65%, with even higher occupancy in business class) and
expected sales to pick-up once the winter season ended. The service
from Cape Town will also carry cargo, including flowers, fish,
trophy animals and perhaps fresh fruit to the U.S. In the
long-term, Delta would like to increase the frequency of the service
to Cape Town to daily service and switch to from the current Boeing
767-300ER to a larger Boeing 767-400ER if passenger traffic
increases. The Boeing 767-300ER accommodates 217 passengers (36
business class and 181 economy class seats). Delta is also
interested in expanding service from the U.S. to Morocco and Angola
to strengthen its presence in Africa.

Airports on Track for 2010, But ACSA Concerned about High
Borrowing Costs

11. (U) Airports Company of SA (ACSA) CEO Monhla Hlahla announced

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that SA's three major airports - OR Tambo International, Cape Town
and Durban International - would be ready by 2010 for the thousands
of FIFA World Cup visitors. She noted that ACSA had modified its
existing expansion plans when the games were announced to
accommodate the peak traffic arriving in 2010 during the weeks of
the World Cup. Hlahla said about 350,000 more passengers would be
arriving in SA during the event. The company will spend R22 billion
($2.8 billion) towards the building and renovation of the country's
airport infrastructure. The smaller airports in Bloemfontein, Port
Elizabeth and East London are also being refurbished. However, ACSA
officials noted that it may have to postpone some of its projects
because of the current high cost of borrowing. The company plans to
raise about R10 billion ($1.3 billion) to meet its financial need
for airport construction and up-grades. Hlahla said, "It has been
very difficult. We issued a bond program and we tried to borrow
against the program, but the prices were just too high. If the cost
of capital continues the way it has, we may have to reconsider some
of our development and postpone them to a later stage." ACSA is
also faced with serious security challenges at its major airports.
It will spend R46 million ($5.8 million) on security at OR Tambo
International Airport ahead of the World Cup. (Business Day and
SABC News, June 11, 2008)

Guatrain on Track for 2010

12. (U) Nearly 5 km of the 15 km underground route of the R25
billion ($3.2 billion) Gautrain project has been completed. The 80
km project will connect Johannesburg, Pretoria, and OR Tambo
International Airport by 2011. The airport link to Johannesburg is
expected to be completed in time for the 2010 FIFA World Cup. The
Gautrain system will include park-and-ride facilities and 150 buses
to provide local transport in a ten-kilometer radius around each
station. Gautrain's 24 trains will be maintained and serviced at a
new train depot. A bus depot will also house the Gautrain's
dedicated fleet of 150 luxury buses. Construction of these
facilities is well advanced, with the bus depot administration
building already complete and the train depot offices and
maintenance workshops targeted for completion within the next few
months. (Engineering News, June 6, 2008)

Motor Industry Running on Empty

13. (U) Four years of booming motor industry sales accompanied by
huge investments have come to a halt as the industry faces
dealership closures and job losses. May vehicle sales (12,095
units) represented the largest decline in nine years. Sales in
three of the four market segments have decreased in 2008. Passenger
vehicle sales declined by 19%, light commercial vehicle sales were
down 9%, and medium commercial sales dropped by 0.4%. The only
market segment to experience growth was the heavy commercial vehicle
segment, which increased 15.6%. Analysts noted that the possibility
of further interest rate hikes was undermining vehicle sales.
(Business Day, June 2, 2008)


Mercedes-Benz SA Expands Truck Range

14. (U) Mercedes-Benz SA (MBSA's) has expanded its Axor truck range
to include an extra-heavy-duty 6x4 truck tractor and freight
carrier. The Axor range was first introduced to SA at the end of
2003, and has since recorded sales of more than 1,650 units in the
extra-heavy segment of the truck market. MBSA Commercial Vehicle
Product Manager Peter Wraight stated that the new addition follows
"extensive market research". The new Axor 6x4 is available in 350
and 400 horsepower models. It is the "culmination of ten years of
planning and collaboration between Mercedes-Benz Germany, and the
local engineers at the truck research center in East London and
development centers in Turkey and Brazil," he said. MBSA Commercial
Vehicle Manager Kobus van Zyl said the new Axor enters the "most
competitive market for Mercedes-Benz worldwide", with more than 30
trucking companies vying for customers' attention. He added that
the booming SA truck market is expected to reach sales of more than
40,000 units in 2008 and continue to grow. The local truck market

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broke through the 37,000 unit barrier in 2007, recording its best
sales performance ever - this while passenger vehicle sales limped
into negative territory. Van Zyl said the SA truck market could
reach 51,000 units by 2012, a level he believes is "definitely
sustainable". MBSA, the current market leader, is expected to
increase its share of the truck market from last year's 3,287 units,
to more than 4,400 units in 2008. The truck market is being driven
by factors such as SAG's infrastructure spending and increasing
demands on the freight market, which has been able to outpace the
current global economic turmoil. The first orders for the new Axor
range has come from coal haulers. Eskom indicated earlier this year
that the power crunch has increased its coal requirements
substantially, which has had a positive impact on the local
coal-mining and coal-hauling markets (and a negative impact on the
road system. (Engineering News, June 6, 2008)

Electricity Distribution Maintenance Backlog - Another
Electricity Crisis Looms

15. (U) Electricity authorities called for action to deal with a
large maintenance backlog that could further stifle economic growth.
SA Local Government Association Chairman Amos Masondo told the
Electricity Distribution Maintenance Summit on June 9, "the current
electrical infrastructure maintenance and refurbishment backlog is
estimated at R26.7 billion ($3.5 billion), on the basis of a recent
analysis." Speakers warned that underinvestment in ageing
infrastructure could plunge SA into another electricity crisis.
Minerals and Energy Minister Buyelwa Sonjica told delegates that the
government had invested about $200 million annually into new
electricity distribution infrastructure, but admitted little money
had been injected into maintenance. She said, "the lack of
maintenance and refurbishment of the electricity distribution
infrastructure poses a threat to our economy." She continued, "The
upcoming 2010 FIFA World Cup and the rapid economic growth of the
country demand more improvement on the capacity of the electricity
distribution infrastructure." The Ssummit also discussed the
stalled implementation of regional electricity distributors (REDS),
which will take over power distribution from municipalities. Deputy
President Phumzile Mlambo-Nguka told delegates there was resistance
to implementing this new system, but insisted there are mechanisms
to ensure that municipalities and Eskom would not lose out. Eskom
is embarking on a $50 billion electricity generation capital
expansion program. (Engineering News and Business Day, June 10,

Minister Says Suez Energy Submitted Binding Offer for IPP
16. (U) Minerals and Energy Minister Buyelwa Sonjica said in her
recent budget speech to Parliament that Suez Energy of France, which
was short-listed with U.S. firm AES, had shown a "strong commitment"
to becoming a developer of the Department of Minerals and Energy's
(DME) independent power producer (IPP) "peaking" project. AES
Q(DME) independent power producer (IPP) "peaking" project. AES
recently withdrew its offer for the project. DME announced the
receipt of a binding offer from a Suez-led consortium for the
construction of two open-cycle gas turbines totaling 1,000 MW.
Minister Sonjica qualified this as "an irreversible process of
establishing IPPs on the journey to achieving our target of 30%
private power generation". Sonjica again urged electricity users to
conserve more power, noting that the SAG was finalizing a regulatory
framework to ensure that the DME's Power Conservation Program was
enforced with penalties for excessive use and wastage of
electricity. (Engineering News, June 6, 2008)

U.S. Gold Miner in SA
17. (U) U.S.-based Eastern Goldfields recently bought Barbrook Gold
Mine in Mpumalanga for $10 million and plans to raise $30 million in
cash through a listing on the Johannesburg Stock Exchange. The
company said the funds would be used to complete development of the
Lily underground gold mine and a nearby metallurgical plant, also in
Mpumalanga. (Business Day, June 10, 2008)

Canadian Business Chamber Flays SA

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18. (U) Canada-SA Chamber of Business President Bruce Shapiro
asserted at the June 9 African Mining Congress that SA's energy
crisis was of its own making and showed that leadership was
incompetent. Shapiro heads the Toronto-based, independent business
chamber which is focused on the resource sector. He cited a number
of other challenges in SA:
* Looming change in political leadership is a risk.
* Crime is the "Achilles heel" in SA.
* SA has not addressed sustainable water supply.
* Skilled labor shortages and obtaining work permits are problems.
* Beneficiation policies are wrong.
* Little has been done on HIV/AIDS.
* Processing of mineral licenses is slow.
* Lack of transparency and political uncertainty are issues.

Unions Give Telkom Silent Treatment
19. (U) Trade unions representing 70% of Telkom staff announced that
they would not engage in any further negotiations until the
fixed-line operator agreed to undertake a thorough investigation
into its outsourcing restructuring plans and signed a "no job loss"
agreement with them. The Communication Workers' Union (CWU),
Solidarity, and the SA Communications Union said they would oppose
the restructuring if it would lead to job losses. The unions are
conducting a study to determine the effects of the restructuring.
The findings will be submitted to the Independent Communication
Authority of SA (ICASA). "If Telkom's plans are approved, more than
90% of jobs in the company will be affected," they said. The unions
said Telkom's deadline for final approval for the restructuring,
which it wanted to achieve by August, would not be reached.
(Business Report, June 11, 2008)

Dubai World Plans to Expand in SA
20. (U) Dubai World Chairman Sultan Ahmed Bin Sulayem told the World
Economic Forum on Africa that the keys to unlocking the potential of
Africa were investment in infrastructure and education. He noted
that, "with solid infrastructure and excellent human resources,
other developments such as real estate, retail properties and
tourism can be established, contributing further to the economy."
Dubai World, which is the investment arm of the Dubai government,
acquired a major shareholding in three SA wildlife reserves for an
undisclosed amount in March 2008. The company acquired Shamwari
Game Reserve in Eastern Cape, Sanbona Wildlife Reserve in Western
Cape and Jock Safari Lodge in the Kruger National Park. Sulayem was
reluctant to disclose the amounts his company would spend in SA, but
said the money would come from the $1 billion fund earmarked for
projects in Africa over the next five years, in addition to the $4
billion already committed. He said Dubai World would build more
luxury lodges in the wildlife reserves as well as a five-star hotel
and 60 private apartments at Pearl Valley Golf Estate in the Cape
vine lands. Dubai World is also expanding the Victoria & Alfred
(V&A) Waterfront in Cape Town to double the space available for
prospective hotel, leisure, and retail tenants. "Our projects for
Qprospective hotel, leisure, and retail tenants. "Our projects for
the V&A Waterfront expansion (as well as the) Pearl Valley hotel and
apartments and Shamwari lodges are in the planning stages," Sulayem
said. The company is formulating plans to make the Nkomazi game
reserve in the Mpumalaga Province eligible to become a World
Heritage site. The company will open a 24-bed luxury tented camp at
the game reserve in November. The development would also include
seven secluded five-star boutique hotels and lodges with a total of
120 beds, a 36-hole championship golf course, a residential estate,
25 luxury private residences and 425 "eco-residences". Projects
outside SA include a $70 million five-star hotel in the Comoros, and
a $250 million hotel in Djibouti. (Business Day and Dubai World
Press Release, June 6, 2008)


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