Cablegate: South Africa Economic News Weekly Newsletter October 24,

DE RUEHSA #2343/01 3011519
R 271519Z OCT 08




E.O. 12958: N/A
2008 ISSUE

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1. (U) Summary. This is Volume 8, issue 43 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Credit Storm Drives SA into Deficit Next Year
- Black Middle Class Stronger
- Zimbabwean Business Leaders Promote South African
- Communications Minister Appeals Altech Judgment
- Emirates Suspends Flight on Johannesburg-Dubai Route
- PetroSA License for 400,000 Barrels/Day Refinery
- Mining Industry Needs Skills
- Two Strikes with Different Outcomes
- Petroleum Pipeline Denied Passage through South Durban
End Summary.

Credit Storm Drives SA into Deficit Next Year

2. (U) Finance Minister Trevor Manuel said that government finances
will slip back into a deficit of 1.6% of GDP next year. This would
be South Africa's first budget deficit since fiscal year 2005-2006.
Presenting the medium-term budget statement to parliament, Manuel
said that the global financial crisis will curb growth in South
Africa and make it harder to finance the country's ambitious
investment plans. His warnings were tempered by reassurances that
South Africa's prudent fiscal policies will help it weather a storm
expected to tilt developed economies into recession. Manuel said
the economic growth rate was set to slow slightly to 3.7% this year
from an earlier forecast of 4%, while growth would subside to 3%
next year. A key pillar supporting growth is the R600 billion ($60
billion) public sector investment program over the next three years.
But funding this program will require a rise in the public sector
borrowing requirement, which will climb from 1.3% of GDP this year
to 3% of GDP next year. On a positive note, inflation was expected
to fall within its official target of 3%-6% in the third quarter of
next year as oil and food prices declined. The new budget framework
adds R171 billion ($15 billion) to the three-year spending plans
tabled in February. Of this, R59 billion ($5.2 billion) will cover
the effects of inflation on salaries and other expenses while R50
billion ($4.3 billion) will be for the balance of the R60 billion
($5.3 billion) Eskom loan. (Business Day, October 22, 2008)

Black Middle Class Stronger

3. (U) South Africa's black middle class - the so-called "Black
Diamonds" -- number approximately three million and for the first
time possess spending power that equals their white middle class
counterparts. TNS Research Surveys found that the emerging black
middle class has increased its spending power from R180 billion ($18
billion) in 2007 to R250 billion ($25 billion) this year. The
majority is becoming more financially savvy, which minimizes the
risk of getting caught up in debt, TNS said. An earlier survey by
TNS showed that only 10% of the black middle class had been affected
by the credit crunch and South Africa's high interest rates.
Middle-class black women are faring particularly well, and now
account for 40% of the R120 billion ($12 billion) spent annually by
all South African women. Almost half of the women interviewed said
Qall South African women. Almost half of the women interviewed said
they earned over 50% of the household income. Over 80% said they
were the main household decision makers when it came to the majority
of purchases. Experts say South Africa's emerging black middle
class is one of the fastest growing in the world, rising from
poverty since the end apartheid in 1994. (Beeld, October 13, 2008)

--------------------------------------------- ----
Zimbabwean Business Leaders Promote South African
--------------------------------------------- ----

4. (U) Zimbabwean business leaders who attended a meeting at the
Johannesburg Stock Exchange (JSE) said that the country's collapsed
economy should not deter South African companies from investing.
Executives from the financial, retail, and mining sectors said
investing in Zimbabwe took bravery, but the rewards made the risk
worth it. Imara Capital Managing Director Sean Gammon commented,
"There are already many businesses established in Zimbabwe ready to

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grow, and they do not need a lot of money to capitalize them, so the
opportunities are vast." Zimbabwe's hugely untapped mining sector,
where South Africa's Implats and Australia's Rio Tinto are scouting
for opportunities, is of particular interest to foreign investors.
Zimbabwe Stock Exchange Chief Executive Emmanuel Munyukwi said South
African companies had the best comparative advantage because they
"understand our market better than any of the rest of the world" and
should buy assets which are cheap in US dollar terms. While the
United Nations and the World Bank had calculated it could take more
than 10 years to fix Zimbabwe's economy, Gammon said an overnight
relaxation of exchange controls would immediately attract investment
and portfolio funds, as well as donor funding, thus quickening the
recovery. (Business Day, October 22, 2008)

--------------------------------------------- --
Communications Minister Appeals Altech Judgment
--------------------------------------------- --

5. (U) Communications Minister Ivy Matsepe-Casaburri is taking the
Independent Communications Authority of SA (ICASA) communications
regulator to court to prevent it from issuing an electronic
communications network services (ECNS) license to JSE-listed Altech.
A court action pitting a minister against an industry regulator is
thought to be unprecedented, and comes after a high court judge
ruled that the minister had overstepped her powers. The judge ruled
that Altech and about 300 other voice and data carriers were
automatically entitled to a license giving them the right to build
their own networks. Matsepe-Casaburri has applied to appeal the
verdict, claiming it would throw her policy of managed
liberalization into chaos, but the appeal has not yet been
considered. The Minister also applied for an order to prevent the
ICASA from issuing an ECNS license. If the Minister's appeal is
rejected, Altech can press ICASA to issue a license so it can begin
to construct a network. The high court's ruling that value added
network services license holders were entitled to ECNS licenses was
a breakthrough for liberalizing the telecommunications industry
because companies would no longer have to lease their bandwidth from
Telkom, Neotel or cellular operators. (Business Day, October 21,

--------------------------------------------- -------
Emirates Suspends Flight on Johannesburg-Dubai Route
--------------------------------------------- -------

6. (U) Emirates has been forced to drop one of its three daily
flights between Johannesburg and Dubai due to slow delivery of
aircraft from aircraft manufacturers Boeing and Airbus. The
schedule change will take effect in February 2009. Emirates
Regional Manager for Southern Africa Fouad Caunhye said that the
schedule change is temporary and that the airline will reinstate the
flight when it receives new aircraft. A strike at Boeing's Seattle
factory delayed the delivery of 39 Boeing 777-300ERs to Emirates.
Caunhye commented that the Boeing 777, which he called the workhorse
of the fleet, is the aircraft model used on the Johannesburg route.
Emirates also ordered 58 Airbus A380s, the first of which was
QEmirates also ordered 58 Airbus A380s, the first of which was
delivered earlier this year. A technical issue relating to the
wiring on the A380 derailed Airbus's delivery schedule last year.
Airbus expects to return to its usual delivery schedule late next
year. (Business Day, October 20, 2008)

--------------------------------------------- ---
PetroSA License for 400,000 Barrels/Day Refinery
--------------------------------------------- ---

7. (U) PetroSA, South Africa's national oil and gas company,
announced on October 2 that it had received a manufacturing license
for its planned 400,000-barrel per day crude oil refinery. The
Mthombo refinery is to be constructed in the Coega industrial
development zone (IDZ) east of Port Elizabeth in the Eastern Cape at
a cost of $11 billion. PetroSA CEO and President Sipho Mkhize said
the refinery would ease the country's current and projected fuel
shortage. It is also of strategic importance to South Africa's
economic development, providing a secure oil supply for the country.
The license allows PetroSA to manufacture refined petroleum
products subject to obtaining environmental and other permits.
Construction is expected to start in 2010 and the refinery should
come on stream in 2014. The refinery would be the biggest in Africa
and would create about 25,000 direct and indirect jobs. PetroSA
previously announced its intention to dedicate the new refinery for

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Venezuelan heavy oil. Critics say that such a big refinery would
far exceed South Africa's own requirements and could make existing
refineries obsolete. The SAG's response is that it will export any
excess to neighboring countries. (Sunday Times, October 12, 2008)

Mining Industry Needs Skills

8. (U) South Africa is not alone in facing the severe skills
shortage afflicting the global mining industry, which has been in
growth mode since about 2002. Some projects are likely to be slowed
or postponed because of the current financial turmoil, but the
industry fundamentals still look good for the medium-term as China
and India are in a major industrial boom. The lack of qualified,
experienced engineers and miners who are able to respond to another
mining growth period is likely to be a major constraint. Ernst &
Young (E&Y) reports that the shortage of skills in the mining
industry is so acute that it is likely to persist even if 5%-10% of
the new projects are halted because of the financial crisis. A 20
to 30-year investment horizon is typical of the mining industry, and
though it is not easy to halt new projects, the firm had seen some
projects cancelled in the past weeks. According to E&Y, HIV/AIDS is
the primary cause of mining skills shortages, followed by
emigration. Estimates are that a third of the country's engineering
graduates have emigrated over the past 40 years. Mining CEOs have
had to adopt smarter strategies to develop and retain their
workforce. In response to the skills shortage, world leader in
coal-to-liquid (CTL) technology Sasol announced an annual financial
contribution of $3 million to South African academia to ensure the
development of world-class science and engineering graduates.
(Business Day, October 16, 2008)

Two Strikes with Different Outcomes

9. (U) Uranium One announced the temporary suspension of operations
at its Dominion uranium mine located 150 kilometers west of
Johannesburg on October 14. This action follows labor disruptions
that started on October 7 in support of employees dismissed for
misconduct that culminated in a general strike. A majority of the
labor force at Dominion have refused to return to work despite
repeated company directives and a court order by the Labor Court to
end the strike. The Company began issuing termination notices to
the strikers and has dismissed 900 of its 2,500 miners.

In the second case, the Black Economic Empowerment (BEE) junior
mining company Pamodzi Gold reached a wage settlement with striking
workers. Miners were on strike for a week over equalization of
wages and demands for pay increases. The agreement includes a 14%
increase (about the current inflation rate) in basic salary, an 8%
increase in provident fund contributions, and a 44% increase in the
housing allowance. (Mining Weekly, October 14, 2008)

--------------------------------------------- ---------
Petroleum Pipeline Denied Passage through South Durban
--------------------------------------------- ---------

10. (U) Communities of south Durban object to Transnet's plan to
Q10. (U) Communities of south Durban object to Transnet's plan to
establish a pipeline to transport petroleum products from costal
refineries to inland territory. Durban South Communities
Environmental Alliance (SDCEA) representative Desmond D'sa said that
local communities experience heavy air pollution and are already
overburdened with 15 other conduit pipelines passing through their
areas. The activist said that the pipelines carry hazardous
products such as benzene, which put locals at risk of developing
asthma or cancer. D'sa also added that over 40 pipeline leaks have
been recorded in south Durban since 1995. Transnet Public
Relations Manager Saret Knoetze said her company plans to build the
pipeline because of heightened demand for transport petroleum
product inland. She argued that Transnet has consulted with all
relevant parties including SDCEA regarding the proposed initiative.
Knoetze emphasized that Transnet was satisfied with the
recommendation to go ahead with the project since it was based on a
balanced and sound environmental evaluation. SDCEA has threatened
to file suit to thwart the proposed pipeline project. (Business
Report, October 16, 2008).

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