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Cablegate: New Investment Plans Robust in Spite of Slowing

VZCZCXRO0331
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #2016/01 2550717
ZNR UUUUU ZZH
R 110717Z SEP 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 5669
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHTN/AMCONSUL CAPE TOWN 5995
RUEHDU/AMCONSUL DURBAN 0146
RUEHJO/AMCONSUL JOHANNESBURG 8352

UNCLAS SECTION 01 OF 02 PRETORIA 002016

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ENRG EINV SF
SUBJECT: NEW INVESTMENT PLANS ROBUST IN SPITE OF SLOWING
ECONOMY IN SOUTH AFRICA

PRETORIA 00002016 001.2 OF 002


1. (SBU) Summary: Record levels of new investment spending
plans were announced in South Africa in the first six months
of 2008. New planned spending by Eskom led the way, but
private sector spending plans were also robust. Investment
spending will compensate for falling consumer spending and
underpin continued economic growth. However, it is unclear
whether investment will reach 25 percent of GDP (the
government's target) in the foreseeable future. End Summary.

------------------------
Investment Plans Aplenty
------------------------

2. (SBU) Record levels of new investment spending plans were
announced in the first half of 2008 in South Africa,
according to Nicky Weimar, an economist at Nedbank and the
coordinator of Nedbank's semi-annual survey of capital
expenditures. Weimar met recently with Deputy Economic
Counselor and Economist Specialist to discuss the survey.

3. (U) Released on August 25, the Nedbank Capital
Expenditure Project Listing showed that plans for new
investment spending remained robust in the first half of
2008, with 80 new projects being announced worth R336 billion
($42 billion). In contrast, only 128 projects worth R224
billion ($28 billion) were announced in all of 2007. (Note:
The Nedbank survey records announcements of new investment
plans; it does not track actual expenditures, which could be
spread out over years. The survey only captures projects
worth R20 million (about $2.5 million) or more. It excludes
investments to replace worn-out or outdated capital goods.
End Note.)

4. (U) The rise in the value of new projects was mainly
attributable to power utility Eskom, which announced during
the first half of the year that its already-large, multi-year
capital expansion program would grow in size by another R243
billion ($30 billion). Planned private sector investment
spending also remained strong, with 64 new projects worth R72
billion ($9 billion) being announced in the first six months
of 2008. Of this amount, the finance and real estate sector
accounted for R38 billion ($4.5 billion), with manufacturing
following at R25 billion ($3 billion). However, the mining
sector announced new projects worth only R6.5 billion (less
than $1 billion), compared with R27 billion ($3 billion) in
the same period in 2007.

--------------
Chugging Along
--------------

5. (SBU) Weimar said that investment spending is poised to
keep the South African economy "chugging along" even as
consumer spending wilts under the impact of high interest
rates. "The new projects will keep demand high for steel,
cement, and construction services," she said, noting that
Nedbank is projecting GDP growth of 3.5 percent in 2008. She
also said that the import-intensity of most infrastructure
projects will keep the current account under heavy pressure.

6. (SBU) Weimar saw little risk of a major let up in
investment spending in the near-to-medium term. She cited
several reasons for optimism: parastatals Eskom and Transnet
are committed to expansion; manufacturing companies are
operating at almost full capacity; mining companies
anticipate years of high commodity prices; and China and
India continue to grow. "Everyone is thinking long-term,"
she said, noting, "Everyone is looking past the current
slowdown." She acknowledged that electricity shortages might
threaten some of the new projects, but she was struck by how
muted the impact of power constraints has been so far.
Qmuted the impact of power constraints has been so far.

7. (SBU) That said, Weimar was skeptical that investment
spending would climb to 25 percent of GDP (the government's
target) anytime in the foreseeable future. (Investment is
currently 21.5 percent of GDP.) She explained that some
infrastructure projects were already hitting bottlenecks
because of skills shortages and insufficient project
capacity. She also claimed that some firms are taking a
"wait and see" posture on investment until the political
environment is sorted out and a new ANC cabinet is in office.
Weimar took comfort, however, from the fact that the
government is in such strong fiscal shape. "The government
has money set aside for infrastructure," she said, citing as
an example its ability to provide guarantees to help Eskom
raise capital.

-------

PRETORIA 00002016 002.2 OF 002


Comment
-------

8. (SBU) Investment as a share of South Africa's GDP did not
exceed 18 percent in any year between 1991 and 2005, and
dipped to a dismal 14 percent in 1993. The culprits behind
this weak performance included heavy public debt, political
uncertainty, high interest rates, and slow growth. These
years of underinvestment have left the country with stressed
and dilapidated infrastructure, as was demonstrated by the
loadshedding of early 2008. The government's massive plans
to upgrade power, ports, airports and other infrastructure,
though overdue, promise to lift the economy to a higher
growth trajectory. However, it is unclear whether the
government's investment target of 25 percent of GDP can be
attained.
BOST

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