Cablegate: South Africa Economic News Weekly Newsletter Septmeber 19,

DE RUEHSA #2071/01 2631525
R 191525Z SEP 08




E.O. 12958: N/A
2008 ISSUE

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1. (U) Summary. This is Volume 8, issue 38 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Weaker Rand, More Inflation Likely for SA
- No Surprises in SARB Governor's Speech
- SA Falls in Economic Freedom Ranking
- SA R&D Expenditure Rising
- Textile Group Pleads to Keep China in Check
- Sanlam Establishes Joint Venture with
Leading Indian Brokerage House
- State 'Loses Sense of Urgency on BEE'
- SAA Increases Service to Germany
- Auto Industry Needs to Improve Global Competitiveness
- Major Development Projects in Cape Town
- Decision on Nuclear Project in Progress
- Eskom to Unveil First Cogen Projects
- PPC Hopes to Expand Plant in Western Cape
- SA Lays Out Its Hydrogen Economy
- Cisco Builds ICT Innovation Center
End Summary.

Weaker Rand, More Inflation Likely for SA

2. (U) Industry analysts report that a prolonged global financial
crisis could curb capital inflows to South Africa and weaken the
rand. The good news is that the financial sector, which makes up a
20% of South Africa's economy, is not heavily exposed to the
offshore credit lines snapped by the collapse of Lehman Brothers.
The bad news is that if the rand depreciates further, the trend will
re-ignite local inflation and delay the interest rate cuts that
markets had expected next year. It would also postpone a recovery
in economic growth, which is expected to slow to just above 3% this
year, from just over 5% last year. If global investors remain risk
averse, it will be difficult for South Africa to attract the capital
needed to finance its huge current account deficit. That would put
pressure on the rand, which has already depreciated about 15%
against the dollar this year. A continued decline of mineral prices
would also erode the value of exports and widen the deficit. The
main threat is whether the U.S. economy tips into a recession and
how this will affect emerging giants such as China. (Business Day,
September 16, 2008)

No Surprises in SARB Governor's Speech

3. (U) South African Reserve Bank (SARB) Governor Tito Mboweni
reiterated the SARB's commitment to price stability during a speech
to shareholders at the SARB's annual general meeting on September
18. Mboweni also said that South African banks had little direct
exposure to the U.S. subprime market. He highlighted the fact that
the cumulative 500 basis-point hike in interest rates since June
2006 has contributed to a slowdown in household consumption spending
growth and a widening of the output gap, which aided in reducing the
risks to the inflation outlook. That, together with lower
international oil prices, prompted the SARB to leave interest rates
unchanged at the August meeting of the Monetary Policy Committee.
However, Mboweni warned that despite the more positive outlook, the
SARB remains concerned over rising inflation expectations, stating
that "... to prevent second-round effects, it is important that
expectations remain well-anchored. Failure to respond appropriately
Qexpectations remain well-anchored. Failure to respond appropriately
could inevitably cause expectations to become dislodged and result
in a further acceleration in inflation." (ABSA Capital, September

SA Falls in Economic Freedom Ranking

4. (U) South Africa fell from 49th to 54th place out of 141
countries in the latest annual Economic Freedom of the World Report.
Judiciary independence and impartiality both rated lower in the
report, which compared data collected in 2006 with that of the
previous year. The report measures economic freedom by considering
factors such as government size, legal system, regulatory
environment (credit, labor, and business), and access to "sound"

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money that is not eroded by inflation or hindered by foreign
exchange controls, and freedom to trade internationally. Free
Market Foundation Executive Director Leon Louw said, "The single
most important factor in economic growth is the legal system."
(Business Day, September 17, 2008)

SA R&D Expenditure Rising

5. (U) The Human Sciences Research Council (HSRC) recently released
its annual national survey on research and development (R&D)
expenditure in South Africa. The survey revealed that R&D
expenditure increased from R14.1 billion ($1.8 billion) in fiscal
year 2005/2006 to R16.5 billion ($2.06 billion) in fiscal year
2006/2007. Department of Science and Technology (DST)
Director-General Dr. Phil Mjwara noted that this put South Africa on
course to meet its goal of spending 1% of gross domestic product on
R&D by fiscal year 2008/2009. Mjwara added that the increasing R&D
expenditure was an indication of the country's growing participation
in and progress towards a knowledge-based economy. The survey
indicated that most R&D was performed in engineering sciences
(20.9%), followed by the natural sciences (20.3%), higher education
(20%), and the medical and health sciences (15.1%). Mjwara said the
survey also revealed that the local business sector was the major
performer and financer of R&D, financing 51.3% of total R&D. Only
10.6% of the R&D was financed from abroad. The survey was
commissioned by the DST and included comprehensive polling of
business, government (including the nine science councils), higher
education, and non-profit organizations. (BuaNews, September 17,

Textile Group Pleads to Keep China in Check

6. (U) Textile and clothing bodies from 17 countries, including
South Africa, have urged the U.S. to protect industries and tighten
monitoring procedures when its quota limits on Chinese garments and
textiles expire next year. The bodies were concerned that export
markets could be overrun by cheap Chinese products. Textile
Federation of South Africa President Abisha Tembo and Export Council
for the Clothing Industry Chairman Jack Kipling were among the
signatories of a letter to U.S. trade representative Susan Schwab
and the U.S. Senate and House of Representatives last week. When
quotas on the products now under safeguard were temporarily lifted
in 2005, Chinese manufacturers reduced prices by 40%, which led to a
600% increase in Chinese imports to the U.S. This triggered the
imposition of the safeguards that will expire next year. "As in
2005, the stakes at risk are enormous for export sectors in Africa,
Central America, the Middle East, the Andean region and Mexico. The
safeguards have preserved $37 billion worth of trade in exports, and
helped keep ... one million jobs. In non-safeguard areas the story
is much different ... where billions of dollars in business have
been lost to China and its unfair trade practices," the letter said.
The U.S. is an attractive market for developing country apparel and
textile exports. However, China has taken 60% of the U.S. market
Qtextile exports. However, China has taken 60% of the U.S. market
share in product segments where imports are not limited by quotas.
(Business day, September 18, 2008)

Sanlam Establishes Joint Venture with
Leading Indian Brokerage House

7. (U) Sanlam Investments took a strategic step into the
fast-growing Indian market by establishing a joint venture with
India's fourth-largest securities house SMC. Sanlam Investments
will contribute $22.5 million to capitalize the ventures. Sanlam
Investments CEO Johan Van der Merwe said this was the first step in
its Indian investment strategy and would be a springboard for
further expansion in the subcontinent and synergies with Sanlam's
other businesses. SMC is one of India's fastest-growing retail
brokerage houses, with a national network of more than 1,350
offices. SMC CEO Subhash Aggarwal reported that its customer base
topped 400,000 and rose by 10,000 on a monthly basis. Sanlam said
India had "massive untapped potential", with $2 trillion in cash
deposits in a country where more than 90% of potential investors did

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not use financial market instruments. India's national savings rate
is about 30%, and is supported by a rapidly rising middle-class and
income standards. "Our projections show that if we capture only
between 2% and 5% of the expected $1 trillion market by 2015, our
business in India could contribute a significant portion to group
profits," Van der Merwe noted. (Business Day, September 17, 2008)

State 'Loses Sense of Urgency on BEE'

8. (U) National Empowerment Fund (NEF) Chairman Ronnie Ntuli
lamented that the South African government seems to have lost its
sense of urgency on Black Economic Empowerment (BEE) on a macro
scale. Ntuli's comments echoed those of Employment Equity
Commission Chairman Jimmy Manyi, who said the employment equity law
was failing to change the workplace significantly. "While many
development finance institutions are making concerted efforts to
create the implementation tools needed for economic transformation,
new energy is necessary at a macro level. Strategies had to create
black-owned enterprise, and include more black people in the
economic mainstream." Manyi said. Ntuli urged a shift away from a
model which only bought in "small, tight-knit black groups into
existing white-owned firms." There was also a "massive need" for
new black enterprises to be created and grown. One possibility
would be for the NEF to become more closely linked to the Department
of Trade and Industry in terms of black empowerment across all
industrial development sectors, and to more effectively identify
trade opportunities for black empowered businesses. (Business Day,
September 18, 2008)

SAA Increases Service to Germany

9. (U) South African Airways (SAA) announced that it would expand to
daily flights between Johannesburg and Munich starting October 1.
SAA decided to increase flights from four to seven flights a week to
meet growing demand. SAA also recently increased service from seven
to ten flights per week between Johannesburg and Frankfurt.
(Engineering News, September 18, 2008)

Auto Industry Needs to Improve
Global Competitiveness

10. (U) Volkswagen South Africa (VWSA) welcomed the announcement of
the structure and content of the new Automotive Production and
Development Program (APDP), following "lengthy deliberation and many
delays". "The industry can now plan ahead through to 2020 with a
much greater degree of certainty," said VWSA CEO David Powels.
However, Powels asserted that the South African motor and component
manufacturing industry has "a long road to travel" before it can
claim global competitiveness. In terms of cost competitiveness, he
believed that there is an approximate 20% lag compared with
manufacturers in Western Europe. "This gap widens to between 30%
and 40% when comparing South African manufacturing cost structures
with those in emerging automotive power-houses such as India and
China," warned Powels. He advocated for increased investment in new
technologies, increased manufacturing depth, and skill development
Qtechnologies, increased manufacturing depth, and skill development
"in order to grow the local content in vehicles manufactured in
South Africa." The automotive industry is strategically important
to South Africa, contributing about 7% to gross domestic product and
accounting for 16% of total exports. (Engineering News, September
19, 2008)

Major Development Projects in Cape Town

11. (U) Cape Town Mayor Helen Zille announced new developments
amounting to about R30 billion ($3.8 billion) for the Cape Town
central business district in the next three to five years.
Two-thirds of the investments are from the private sector. Zille
said that the Cape metro region as a whole was expected to see 9.5%
growth in fixed investment in the medium-term. According to Zille,
public investments included the R2.5 billion ($300 million) airport
upgrade, R4 billion ($500 million) for the 2010 FIFA World Cup

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stadium, R4.2 billion ($520 million) for the container harbor
expansion at the port, R1.3 billion ($160 million) for the first
phase of the bus-rapid-transit-system, and several billion rand for
road and rail upgrades. Private sector Developments include further
expansion of the Victoria & Alfred Waterfront, the Strand on
Adderley development worth R2.5 billion ($310 million), the Media24
head office expansion, the Chevron refinery expansion, and
development of the Old Mutual's Malgas building. The Malgas
building will cost R137 million ($17 million) and, at 137 meters,
will be among Africa's highest when finished. (Business Day,
September 16, 2008)

Decision on Nuclear Project in Progress

12. (U) The procurement and investment decision process for the
proposed Nuclear-1 pressurized water reactor (PWR) nuclear power
stations are underway, state-owned power utility Eskom said on
September 16, noting no decision had yet been taken. Eskom appealed
to the media "and other interested parties" to allow space for the
commercial process to unfold and be concluded. Eskom General
Manager Brian Statham said on September 17 that the utility will
reach a decision within the week. However, an Eskom spokesman said
the company had not set a particular date for announcing a decision.
"The process is well under way, we can't state any particular date.
Our intention is to finalize the process by the end of the year,"
Fani Zulu said. Eskom was evaluating bids for the proposed nuclear
power stations from two suppliers of PWR technology: the EPR
Consortium led by Areva of France and the N-Powerment Consortium led
by Westinghouse of the U.S. The EPR Consortium is offering two
1,650 MW EPR units for a total station capacity of 3,300 MW, while
N-Powerment is officering three 1,140 MW AP1000 units for a total
station capacity of 3,420 MW. Statham said Eskom had a number of
potential locations for the power plants and the exact locations
will depend on the type of plant chosen. (Engineering News,
September 16-17, 2008)

Eskom to Unveil First Cogen Projects

13. (U) State power utility Eskom is expected to unveil the first
cogeneration projects, forming part of the Pilot National
Cogeneration Project (PNCP), by the end of this month, but it is
unclear whether these projects would meet the initial 900 MW target.
Speaking at the Cogeneration World Africa 2008 Conference in
Johannesburg, on September 16, PNCP project leader Akash Prakash
stressed the initiative was the forerunner to the larger,
medium-term power purchase program (MTPPP), for which bids must be
submitted by year-end. Eskom had previously reported receiving 15
cogeneration bids ahead of the PNCP's May 31 deadline. Together
with the MTPPP, Eskom hopes to facilitate the introduction of about
3,000 MW of cogenerated power by 2012. Eskom has been given the
controversial mandate as the country's "single buyer" of power
arising from industrial facilities and potential new independent
power producers. However, the National Energy Regulator of South
Qpower producers. However, the National Energy Regulator of South
Africa (NERSA) has objected to the arrangement and has called for
the creation of an agency, separate from Eskom, to purchase power
arising from the power sector. Eskom is still proceeding with both
its PNCP and MTPPP and has let it be known that it is willing to
contract at prices between 8-13 U.S. cents per kilowatt-hour (kwh)
for 2009-2013, with prices falling progressively from 2014 to an
eventual level of 5 U.S. cents per kwh in 2018 (it is not clear that
a future reduction in pricing will be financeable). Industry and
NERSA have criticized Eskom for not being receptive to practical and
transparent arrangements for buying electricity from the private
sector. (Engineering News, September 16, 2008)

PPC Hopes to Expand Plant
in Western Cape

14. (U) Cement Producer PPC has released the final 1,200-page
environmental impact assessment (EIA) report for its planned R4
billion ($500 million) expansion and upgrade of the aging Riebeeck
cement factory in the Western Cape Province. The new plant would
have a capacity of around 1.3 million tons of cement per year,

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according to PPC. Should the Western Cape Environmental Affairs
Department approve the project, construction would start in mid-2009
and take three years to complete. Approval of the EIA is not a
foregone conclusion, because there may be local or NGO opposition.
Moreover, new EIA legislation is still under review by government.
The new cement plant would be considerably more efficient than the
existing plant, which produces 550,000 tons per year. The new plant
would use less water, energy, and 30% less coal per ton of cement
produced. PPC said bag filters would control dust emissions from
the kilns stacks, limiting dust concentration in the cleaned gas to
below the level of 50 milligrams per cubic meter, satisfying
international and South African standards. Chief Operating Officer
Orrie Fenn said the new plant was aimed at meeting the growing
demand for cement in the Western Cape. South Africa's cement demand
has grown by nearly 60% over the past five years and coupled with
government's focus on infrastructure development, the Western Cape
could face a shortage of cement in the next five years if production
capacity is not increased, he said. (Engineering News, September
15, 2008)

SA Lays Out Its Hydrogen Economy

15. (U) The Department of Science and Technology (DST) revealed
earlier that it had selected hydrogen and fuel cell technologies as
key research themes under its frontier science and technology
program. With South Africa possessing about 80% of the world's
known platinum-group metal (PGM) reserves, and PGMs having
applicability for fuel cells, the government felt there was a
natural synergy. DST Minister Mosibudi Mangena argued that the link
between PGMs and new energy alternatives had the potential to raise
South Africa's strategic importance in the global economy. He made
the remarks during the launch of the hydrogen and fuel technologies
research, development, and innovation strategy, which was approved
by the Cabinet last May. The strategy also proposes to build on
existing knowledge of high-temperature, gas-cooled nuclear reactors
and coal gasification and liquefaction technology to develop new
cost-competitive hydrogen-generation solutions. Three centers of
competence would be established to drive the various elements of the
strategy. The Center of Competence for Catalyst would be jointly
hosted by state-owned minerals research entity Mintek and the
University of Cape Town. The University of the Western Cape would
host the Center for Systems Integration and Validation, while the
Council for Scientific and Industrial Research (CSIR) and the
University of the North West would jointly host the Hydrogen
Infrastructure Center of Competence (currently engaged in Pebble Bed
Modular Reactor (PBMR) - related research). (Engineering News,
September 17, 2008)

Cisco Builds ICT Innovation Center

16. (U) Cisco announced a R215 million ($27 million) investment to
create an ICT innovation hub center in Gauteng Province. The Cisco
Innovation Hub Technology Center (CIHTC) aims to develop skills,
QInnovation Hub Technology Center (CIHTC) aims to develop skills,
intellectual property, entrepreneurship, and solution development
capabilities in the local ICT sector. These initiatives are
expected to drive a R1 billion ($125 million) gross domestic product
increase over an initial five-year period. Cisco South Africa MD
Steve Midgley said the company was making this investment to ensure
that South Africa had enough skills, solution creation capabilities,
and intellectual property to benefit from broadband when the
"revolution really kicks off". "South Africa is on the brink of
entering a broadband boom," he noted. According to Midgley, this
will change the way people live and work and should create an
enabling platform from which new business models can be developed.
The CIHTC is expected to create at least 200 direct and 800 indirect
employment opportunities. Initiatives at the CIHTC will include a
Global Talent Acquisition Program (GTAP), the Cisco Netversity,
Entrepreneur Institute, and a software development program. The
CITHC focuses on developing technology solutions to solve common
business challenges in South Africa such as improving education and
crime prevention strategies. GTAP aims to tackle the growing
shortage of skilled networking professionals and has already
absorbed the first group of students to create high-level network
entrepreneurs at the Cisco Certified Internetwork Expert (CCIE)
level. Cisco aspires to train at least 120 CCIE-level network

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engineers over a five-year period for the local market, at its own
cost. Netversity aims to develop 150 network design engineers
through an experiential architecture and design program. The
company also hopes to train 250 entrepreneurs through its
Entrepreneur Institute. (Engineering News, September 15, 2008)


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