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

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FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 5203
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEHJO/AMCONSUL JOHANNESBURG 8239
RUEHTN/AMCONSUL CAPE TOWN 5849
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UNCLAS SECTION 01 OF 05 PRETORIA 001633

DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR TRINA RAND
USTR FOR COLEMAN

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TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
PGOV, SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER JULY 25, 2008
ISSUE

PRETORIA 00001633 001.2 OF 005


1. (U) Summary. This is Volume 8, issue 30 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- BER Predicts Slower Economic Growth and an Easing in
Interest Rate Hikes
- Treasury Sticks to 4% Growth Forecast
- Manuel Does Not See Tax and Tariff Reductions as a
Solution to Price Pressures
- Wage Hike in the Textile Industry May be Positive for
Inflation
- Road Accidents Dent Economy
- Labor Strikes over Power Crises Halts Auto Production
throughout SA
- Renault-Nissan Investment Welcomed by Struggling Auto
Industry
- Eskom Welcomes Front-loading of Government Loan
- Eskom Worried about Rising Costs and Plant Outages
- Vodacom Looks Beyond SA to Drive Growth
- Chinese Company Seeks to Become Leader in African ICT
Skills Development
End Summary.

------------------------------------------
BER Predicts Slower Economic Growth and an
Easing in Interest Rate Hikes
------------------------------------------

2. (U) The University of Stellenbosch Bureau for Economic Research
(BER) released its third quarter prospects report, which predicted a
tough road for the South African economy. The report also indicated
that new weighting changes to the CPIX (consumer price index minus
mortgage costs) inflation measure would provide "some relief".
Growth would slow further as the effect of interest rate hikes in
April and June fed through to the economy. In light of the
deteriorating growth outlook, BER Economist Hugo Pienaar forecasted
an end to the current interest rate raising cycle and predicted the
next interest rate reduction would be in June 2009. Nedbank's Chief
Economist Dennis Dykes expressed similar views on the outlook for
interest rates in 2009. Growth in gross domestic product (GDP) fell
sharply from more than 5% in the fourth quarter of 2007 to 2.1% in
the first quarter of 2008. Pienaar said the disappointing first
quarter growth figure was "unlikely to be a once-off event". The
BER is revising its 2008 annual GDP growth forecast down from 3.4%
to 3.2%, while next year's growth forecast is downgraded from 3.8%
to 3%. Pienaar attributed the downward revision to slower private
consumption as well as a slowing in total fixed investment. He said
there was a strong correlation between business confidence and
growth. He cited a 19-point plunge in the business confidence index
in the first quarter and a further 3-point fall in the second, as
one of the reasons for downgrading growth prospects. The
two-quarter fall from 67 to 45 points shows that more than half the
respondents are dissatisfied with the business environment. The
BER's latest forecast comes after a 5 percentage point upward
adjustment in the Reserve Bank's official repo rate, since June
2006, which has pushed benchmark mortgage and interest rates to
15.5%. The interest rate rise came as inflation rose above the
Reserve Bank's 3 to 6% target range. The CPIX, the central bank's
benchmark index, has been above the range since April 2007 and was
10.9% in May 2008. The BER forecasts that CPIX will peak in
September at more than 13% and will average 11.4% this year.
QSeptember at more than 13% and will average 11.4% this year.
However, BER has revised its 2009 inflation forecast down from 8.1%
to "closer to 7%", following the release of Statistics SA's new
weights for the CPIX consumer basket next year. Pienaar noted that
the degree of monetary easing will depend on how sharply GDP growth
slows next year and whether actual CPIX inflation - due to the new
weights and/or potential sharp fall in the oil price - turns out to
be lower than expected. The BER analysts said the second quarter
GDP figures should show a temporary improvement as electricity
supply recovered. The BER does not anticipate a recession, but
notes that certain sectors like manufacturing and retail are likely
to be in recession. The large external funding requirement of the
current account deficit also remains an important risk factor for
the Rand. "Combined with a projected recovery in the U.S. Dollar
versus the Euro over the next 12 to 18 months, the Rand is
forecasted to weaken against the greenback, but to strengthen
somewhat against a softer Euro," noted the BER. It forecasted the
rand to average R8.45 per dollar during the fourth quarter, which
would imply a 13% depreciation from the current R7.50 level.

PRETORIA 00001633 002.2 OF 005


(Business Day and Business Report, July 24-25, 2008)

-------------------------------------
Treasury Sticks to 4% Growth Forecast
-------------------------------------

3. (U) Finance Minister Manuel told parliament that the National
Treasury sees no reason to revise its 4% growth forecast presented
at the time of the February 2008 Budget, despite the deterioration
in the global and domestic economic environment. Manuel also
rejected the notion that the South African economy may be heading
for a recession, stating that "It is still too early to tell", but
that the Treasury will keep a close eye on developments. In the
first quarter of 2008, real GDP growth advanced at an annualized
pace of 2.1%, and Manuel argued that even if the economy records no
further growth for the rest of the year, annual growth in 2008 will
still be 2.4%. Moreover, if growth remains at around 3% over the
next three quarters, annual growth will be around 3.5% in 2008. The
marked growth slowdown in the first quarter was mainly as a result
of electricity supply disruptions. Though some mines and large
industrial customers continue to operate with below optimal
electricity supplies, the overall electricity supply situation seems
to have stabilized for now, which is likely to contribute to a
growth rebound in the second quarter of 2008. Most economists agree
that talk of a recession may be premature, but nevertheless think
that the Treasury's current 4% growth projection may be overly
optimistic because business and consumer confidence had already sunk
to very low levels. (ABSA-Newsletter, July 22, 2008)

---------------------------------------------
Manuel Does Not See Tax and Tariff Reductions
as a Solution to Price Pressures
---------------------------------------------

4. (U) Finance Minister Manuel rejected calls for lower food and
fuel taxes in parliament, arguing that the Treasury's investigations
found no compelling reasons for tax relief. He noted that 19 basic
food items are already VAT zero-rated. These items have been
selected to benefit the poor, but there is evidence that some
producers and suppliers may be benefiting from the current regime.
On the fuel levy, Manuel argued that the domestic fuel price is
determined primarily by movements in the international oil price and
the exchange rate. Fuel taxes play a small part since these taxes
are specific taxes fixed for a year and they are low in comparison
with other parts of the world. The primary sectors of the economy
already benefit from the diesel tax rebate scheme. Moreover, a
reduction in the fuel levy may require raising other taxes, such as
company or individual taxes, to compensate for a revenue loss.
There are also other issues such as changing energy consumption
behavior, improving energy efficiency and broader environmental
concerns that need to be considered. Although a reduction in food
and fuel taxes may have brought a temporary reprieve, the inflation
problem in South Africa is more broad-based than just food and fuel
price inflation. In May 2008, around 86% of the CPIX basket was
rising by 6% or more, compared with just 40% in March 2007.
Considering these pressures, and that the Reserve Bank still needs
QConsidering these pressures, and that the Reserve Bank still needs
to factor recent electricity tariff hikes of around 30% into their
forecasts, there is still a risk of a further 50-basis-points
interest rate hike in August 2008. (ABSA- Newsletter, July 22,
2008)

---------------------------------
Wage Hike in the Textile Industry
May be Positive for Inflation
----------------------------------

5. (U) South Africa's clothing and textile workers Union (SACTWU)
announced that it had reached an agreement for wage increases of
between 8% and 11% in six of the nine sub-sectors of the textile
industry. This increase will be backdated to July 1, 2008. In an
environment where the latest CPIX inflation figure was 10.9% y/y in
May, and a peak of above 12% expected in the third quarter of 2008,
the latest wage settlement could be viewed in a positive light.
Moreover, CPIX clothing increased by 9.7% y/y in May, suggesting
very little additional inflationary pressure from the wage
settlement. (Beeld, July 23, 2008)

---------------------------
Road Accidents Dent Economy

PRETORIA 00001633 003.2 OF 005


---------------------------

6. (U) The Department of Transport reported that road accidents cost
the economy an estimated R581 billion ($77 billion) between 1996 and
2006. The report includes the cost of injuries in its assessment of
the economic toll of road accidents. "The estimated total costs of
road accidents over the eleven year period give an idea of how much
South Africa has lost out on potential production input or skills,"
the report said. More than 13,000 people are killed on South
African roads each year, making the country one of the most
dangerous in the world for drivers. Speeding, a lack of policing,
and the high number of vehicles on the road that are not roadworthy
are among the factors that have made South African roads unsafe.
(Beeld, July 22, 2008)

-------------------------------------
Labor Strikes over Power Crisis Halts
Auto Production throughout SA
-------------------------------------

7. (U) Carmakers in South Africa halted production on July 23, after
a trade union federation strike kept employees away from work. The
Congress of South African Trade Unions (COSATU) called on its
members in the Eastern Cape (South Africa's auto-manufacturing hub),
Limpopo, North West and Gauteng provinces, to embark on a strike.
This was in protest of rising power, fuel, and food prices, as well
as over job losses stemming from the power crisis that hit the
country in January. Ford, Daimler, General Motors and Volkswagen
all closed their plants in the country for the day. Volkswagen
South Africa employs 5,500 people, and all production-related staff
were not at work; meaning 300 to 400 cars were lost, said
spokesperson Bill Stephens. Daimler, which manufactures Mercedes
Benz C-Class luxury vehicles and Mitsubishi Triton cars in East
London, typically produces 220 units a day, spokesperson Annelise
van der Laan said. The firm employs a total of 3,000 people in
South Africa. Ford South Africa Spokesperson Rella Bernardes said
that it would lose production of 340 vehicles, after shutting its
Pretoria plant, as well as the 600 engines it would have assembled.
COSATU has called for another work stoppage on August 6.
(Engineering News, July 23, 2008)

----------------------------------
Renault-Nissan Investment Welcomed
by Struggling Auto Industry
----------------------------------

8. (U) Renault-Nissan announced it will invest about R1 billion in
Nissan South Africa's assembly plant in Rosslyn, near Pretoria. The
investment will be for the production of a new Nissan half-ton
pickup and the Renault Sandero. The Sandero will be the first
Renault vehicle to be manufactured locally. The investment would
increase the plant's capacity from 40,000 units per year to 68,000
units per year in 2009. It would create 300 new jobs in the plant
this year. Nissan currently has a workforce of about 1,900, after
retrenching 410 workers last year, when a contract manufacturing
agreement with Fiat Auto South Africa expired and production of the
Nissan 1400 Bakkie ceased because of emission control legislation.
The new jobs are being created at a time when the local motor
industry is under severe pressure because of a sharp slump in sales,
Qindustry is under severe pressure because of a sharp slump in sales,
largely due to a series of interest rate hikes since June 2006 and
the impact of inflationary pressures on consumers' disposable
income. This has led to the closure of several dealerships and
retrenchments in the retail motor industry. Manufacturers have been
under pressure to align their production with new vehicle market
demand. General Motors South Africa reported earlier this month
that it was planning to retrench 520 workers. Nissan South Africa
Managing Director Mike Whitfield said Nissan and Renault were
reaffirming their commitment to South Africa with this manufacturing
project. Apart from increasing the production capacity of the
plant, the investment would be used to adapt the two vehicles to
right-hand drive for the domestic market and to develop the local
components and accessories supply chain. Local content in the
vehicles will be 25% when production begins and will gradually
increase. The cars would initially be sold in the local market but
export opportunities for both vehicles were being investigated, said
Whitfield. The new Nissan pickup would go on sale in October and
sales were expected to exceed 17,000 units a year. Renault South
Africa Managing Director Xavier Gobille said Renault would be
expanding its local line with products ranging from entry-level to

PRETORIA 00001633 004.2 OF 005


upper-range vehicles. This would include the launch of Renault's
first crossover vehicle this year. (Business Report, July 22,
2008)

--------------------------------------------- --
Eskom Welcomes Front-loading of Government Loan
--------------------------------------------- --

9. (U) State-owned electricity producer Eskom has welcomed the
National Treasury's decision to bring forward the disbursement of
the R60 billion ($8.5 billion) deeply subordinated loan from
government. Finance Minister Trevor Manuel unveiled the details of
the capital injection, funding of which will be accelerated over
three years, instead of the originally-announced five years. Manuel
indicated that the decision to front-load the share-holder loan was
based on an analysis of the best way "to ameliorate the negative
impact on Eskom's balance sheet, while smoothing the impact of
tariff increases." "In addition to the deeply subordinated loan,
government will consider providing guarantees to enable Eskom to
access funding otherwise not available," National Treasury said in a
statement. News of the injection came as Eskom officials set off on
a European road show, where they will map out how they plan to close
a R150 billion ($20 billion) funding gap through borrowings on the
South African and international capital markets. (Engineering News,
the Weekender, Mail & Guardian, Sunday Times, and Business Day, July
18-22, 2008)

--------------------------------------------- -----
Eskom Worried about Rising Costs and Plant Outages
--------------------------------------------- -----

10. (U) Eskom's new chairperson Bobby Godsell announced that the
spike in coal and diesel costs had put a massive dent in Eskom's
bottom line for the fiscal year ending March 31, 2008. Primary
energy costs, accounting for 46% of Eskom's running costs, rose by
R5 billion ($667 million) to R18 billion ($2.4 billion), compared to
the prior year. The appointment of the new chairperson is intended
to help Eskom achieve a stabilization strategy it hopes will restore
investor and public confidence. Outgoing Chairman Valli Moosa said,
"I'm confident the entire winter will go without any load-shedding
whatsoever." CEO Jacob Maroga said the power system had stabilized
since May, but was "not out of the woods", adding that Eskom's
reserve margin of 6% compared to the target of 15%. "Our number one
priority is to keep the lights on," Maroga said. "Our second
priority is to execute strategy and secure funding for capital
expansion." Eskom continues to fret about coal availability and
prices. Adding further to its woes, Eskom temporarily shut down
three generating units (totaling 2,154 MW) this week: one of the
units at its Koeberg nuclear station and coal-fired units at Majuba
and Duvha. Eskom warned consumers of a higher risk of load-shedding
and again called for a reduction in demand. Separately, Eskom
promised to clarify the utility's approach to new connections with
the imminent release of a comprehensive policy. (Engineering News,
the Weekender, Mail & Guardian, Sunday Times, and Business Day, July
18-22, 2008)

---------------------------------------
Vodacom Looks Beyond SA to Drive Growth
QVodacom Looks Beyond SA to Drive Growth
---------------------------------------

11. (U) Vodacom reported steady customer growth across its five
markets, but its South African operations showed only a moderate
rise of 0.3% to 24.9 million. The new Vodacom CEO Pieter Uys said
that although there were still growth opportunities in the next 18
months, aggressive expansion in other parts of the continent and
acquisitions for its internet operation, Vodacom Business, were
required. Uys is taking over from Alan Knott-Craig, who retires in
September. Vodacom's domestic market share fell to 54% from 55% in
March. Stanlib analyst Zwelakhe Mnguni said performance from South
Africa was disappointing and was evidence that the local market was
mature. "The key thing is that Vodacom's market share came off by
1%. That may not sound material but it does put them on the back
foot in a near-saturation voice market. The South African market has
reached a SIM-penetration rate of 96%, which is very high compared
with other countries on the continent where the rate is in the 20%
to 30% range," he said. Vodacom's overall customer base grew by
6.6% to 34.6 million, helped by businesses in Lesotho, Mozambique,
the Democratic Republic of Congo (DRC) and Tanzania. Mnguni said
Tanzania and the DRC seemed to be the next growth engines. "Overall

PRETORIA 00001633 005.2 OF 005


it is clear that the group still has some growth momentum but all
the thrust comes from outside South Africa," he said. (Business
Report, July 23, 2008)

-----------------------------------------
Chinese Company Seeks to Become Leader in
African ICT Skills Development
-----------------------------------------

12. (U) Chinese telecommunications network solutions and equipment
provider Huawei Technologies is seeking to position itself as a
market leader in training Africans. The company, which reported
total revenue of $16-billion in 2007, has been in operation for 20
years and has 100 international branches. Huawei manufactures and
markets telecommunications services to South African telecoms
companies Telkom, MTN, Vodacom, Cell C and Neotel. Huawei Chief
Operating Officer Xue Bo said the company has built four training
centers across Africa over the last couple of years, with the latest
being built in Angola. "Over the last couple of years, more than
4,000 students have graduated from these training centers with
skills in telecommunications products and management," he noted.
The company has full-time professional instructors and engineers
conducting the training. Huawei is also seeking to invest in
programs focused on corporate social investment initiatives and, in
the future, is looking to help university students get on-the-job
training and to provide employment opportunities by establishing a
scholarship program. "We are aiming to position the company as a
leading telecommunications supplier and create job opportunities in
South Africa. We want to encourage skills transfer, as there is
room for development in the telecommunications industry, and the
company wants to be a part of the solution," he added. Huawei
employs more than 3,000 people in Southern Africa, with 70% local
staff. "It is our aim to provide end-to-end solutions, network
consultation and construction, among others," he said. Huawei
opened its office in South Africa in 1988 and Vodafone awarded
Huawei the Global Supplier Award for outstanding performance in
2007. (Engineering News, July 25, 2008)

BOST

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