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Cablegate: South Africa Economic News Weekly Newsletter October 31,

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RUCPCIM/CIMS NTDB WASHDC
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TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
PGOV, SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER OCTOBER 31,
2008 ISSUE

PRETORIA 00002390 001.2 OF 004


1. (U) Summary. This is Volume 8, issue 44 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- CPIX Inflation Drops
- SA Receives 'Negative' Rating
- Mboweni: South Africans Ignorant of Crisis
- Corn Farming Not Profitable in Current
Climate
- SA Unemployment Rate Higher
- SACU in EU-South Africa Talks Crossfire
- Polokwane International Airport Now Open
- Ford South Africa Set to Reduce Production Platforms and
Target Global Export Market
- Eskom Names Pre-qualified Developers for Independent
Base-load Program
- Sasol Seeks Greater Upstream Independence
- Rehabilitating Defunct Mines Proves Costly for DME

End Summary.

--------------------
CPIX Inflation Drops
--------------------

2. (U) CPIX inflation (CPI less mortgage interest) in South Africa
dropped for the first time in twelve months, falling from 13.6% in
August to 13.0% in September. Headline CPI inflation fell from
13.7% to 13.1%. Forecasters had predicted that both measures would
ease to 13.3%. Experts say that CPIX inflation peaked in August and
will continue to fall in coming months. While rand weakness and
volatility pose key inflationary risks, the South African Reserve
Bank (SARB) is likely to remain focused on the expected improvement
in the medium-term inflation outlook, as slower economic growth and
a new CPI methodology should pull inflation lower. The
better-than-expected inflation supports the notion that interest
rate relief may come during the first six months of 2009, even as
inflation remains above the 6% inflation target ceiling. (ABSA
Capital Research, October 30, 2008)

-----------------------------
SA Receives 'Negative' Rating
-----------------------------

3. (U) Rating and Investment Information Incorporated (R&I) has
revised its rating outlook for South Africa from stable to negative.
South Africa's domestic and foreign currency debt ratings remain
unchanged at "A" and "A-" respectively. The National Treasury
observed that the South African government is aware of the
challenges regarding the current account deficit, inflationary
environment, and GDP growth outlook of the country. "These
challenges are not unexpected and government took appropriate
measures early on to address them," said a Treasury official,
adding, "these [measures] include significantly reducing the level
of government debt and increasing official reserves through
sustained prudent fiscal and monetary policies. As a result, South
Africa is well positioned to weather the current global financial
crisis." R&I was the first and remains the only major rating agency
to rate South Africa's foreign currency debt issue in the single "A"
category ("A-" with a stable outlook) since December 2006. (I-Net
Bridge, October 24, 2008)


------------------------------------------
Mboweni: South Africans Ignorant of Crisis
------------------------------------------

4. (U) SARB Governor Tito Mboweni, speaking at the Bond Exchange's
annual Spire Awards, delivered three stern messages: inflation
targeting should be left alone; a weak rand should not be pursued;
and a larger fiscal deficit would not be appropriate. He said that
Qand a larger fiscal deficit would not be appropriate. He said that
people calling to abandon inflation targeting, weaken the rand, and
rack up larger fiscal deficits should be "prayed for." Mboweni said
that sound macro-economic policies and strong regulation, including
unpopular exchange controls, will ensure that South Africa is able
to ride out the global financial storm better than most other
countries. Mboweni also said that South Africans are not
sufficiently aware that they are living through a severe global
crisis because they are relatively protected from its impact. "I

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can tell you we are living through a major crisis not seen maybe
since the 1930's," he emphasized. "The world as we know it has
changed, but it is difficult to make sense in South Africa," he
said. (Beeld, October 24, 2008)

--------------------------------------------- -
Corn Farming Not Profitable in Current Climate
--------------------------------------------- -

5. (U) The Department of Agriculture's Crop Estimates Committee said
the land area upon which farmers might plant could be cut to from
last year's 2.7 million hectares to 2.5 million hectares. The
Committee attributed this to limited availability of credit, higher
input costs and lower international corn prices. Overall input
costs have increased 90% since last September. Grain SA Economist
Nico Hawkins said fertilizers, chemicals and farm equipment costs
have risen. However, the price of corn has not increased at all for
the past 16 months, said Hawkins. At current prices, farmers might
consider switching to crops such as soybeans and sunflowers. It is
expected that a global recession would have a significant impact on
corn prices, especially in China and the US, the latter of which
subsidizes about a third of its crop for the production of ethanol.
(Business Times, October 26, 2008)

---------------------------
SA Unemployment Rate Higher
---------------------------

6. (U) Statistics South Africa's (StatsSA) Quarterly Labor Force
Survey (QLFS) reports that the official unemployment rate edged up
from 23.1% in the second quarter of 2008 to 23.2% in the third
quarter. The number of people with a job decreased from 13,729
million in the second quarter to 13,655 million in the third
quarter. A sharp 7.1% drop in informal sector employment, which
shed 165,000 jobs, is to blame for the higher unemployment rate.
This informal sector job loss more than offset a gain of 24,000 new
jobs in formal sector employment, which excludes agriculture. Most
sectors of the economy shed jobs between July and September,
reported the QLFS, with the biggest cuts taking place in finance,
manufacturing and mining. Employment in the mining sector dropped
9.2% to 314,000, while employment in the finance sector fell 3.3% to
1.632 million. Employment in the construction sector, the economy's
fastest growing sector, dived 3.2% to 1.102 million. South Africa's
unemployment rate peaked at 29.3% in 2003 and has hovered around
23.1% since 2006. (Business Day and Beeld, October 29, 2008)


---------------------------------------
SACU in EU-South Africa Talks Crossfire
---------------------------------------

7. (U) Fears persist that South Africa might use the implementation
of the South African Custom Union's (SACU) Economic Partnership
Agreement (EPA) with the European Union (EU) as a reason to break up
SACU. SACU was split last year when Botswana, Lesotho, Namibia and
Swaziland broke ranks with South Africa and signed the interim EPA,
which brings bilateral trade with Europe into conformity with WTO
rules. SACU members are prohibited under the SACU membership
agreement from entering into new preferential trade agreements with
third parties without the consent of other members. Sources say
Qthird parties without the consent of other members. Sources say
South Africa may use the split over the EPA to break up the union
and escape SACU's customs-revenue sharing agreement. South Africa
pays large sums of money to the other SACU members under the
agreement. These payments equal as much as half of the government
budgets in Lesotho and Swaziland and a still significant amount of
the budgets in Botswana and Namibia. A source close to the EPA
talks said, "There is political will to kill the union because of
the customs payments. Everyone seems to agree that the EPA will not
include South Africa, but that means South Africa also does not want
the others to sign." The death of SACU would have grave economic
implications for all of the member states. The governments of
Lesotho and Swaziland rely heavily on SACU revenues. In the absence
of a WTO-compatible EPA, Botswana and Namibia's exports to Europe
revert to GSP status, under which tariffs are even steeper. The
loss of these revenues and trade preferences could have severe
economic impact on all four countries. (Business Day, October 28,
2008)

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

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Polokwane International Airport Now Open
----------------------------------------

8. (U) The new Polokwane International Airport was opened at a
special event on October 21. The airport is owned and managed by
Limpopo province. Authorities are hopeful that the new facility
will attract more foreign tourists and contribute to the province's
economy during and beyond the 2010 FIFA World Cup. It is expected
that the Polokwane Airport will service about 200,000 passengers per
year. (Travel Hub Report, October 27, 2008)

------------------------------------------
Ford South Africa Set to Reduce Production
Platforms and Target Global Export Market
------------------------------------------

9. (U) Ford Motor Company of Southern Africa CEO Hal Feder announced
that Ford is flattening its global manufacturing structure and
reducing its number of production platforms from 25 to 9. "We'll do
this by being smarter, and without diminishing the number of brands
we have," Feder noted. A "platform" is a shared base on which
several models may be built. The new Fiesta, to be launched at the
Johannesburg International Motor Show next month, represents one of
Ford's new platforms. "By doing this, we'll see a significant
improvement in cost - we'll be able to buy parts in millions, and
not thousands - and we'll be able to improve the quality of our
vehicles," said Feder. The changes at Ford SA will ensure that
about 92% of the company's showroom will be new or refreshed by
mid-2009. These developments are part of Ford's new global product
development and product revitalization strategy, called the One Ford
Vision - a single global company designing and building cars for a
single, global customer base, not divided by regional or national
borders. Ford will produce 65,000 units from four platforms in
2008, and 110,000 units from one platform in 2011. Ford plans to
sell 20,000 of these final units locally, and export 90,000 units to
Africa and Europe. (Engineering News, October 24, 2008)

------------------------------------
Eskom Names Pre-qualified Developers
for Independent Base-load Program
------------------------------------


10. (U) Eskom released the names of the 23 national and
international developers that it unconditionally pre-qualified to
produce electricity under the multi-site base-load independent power
producer program. Eskom Demand-Side Management General Manager
Andrew Etzinger confirmed that the bids predominately featured
conventional coal technologies. He noted that developers would
submit detailed plant design and environment mitigation steps during
the next round of the process. A liquefied natural gas plant, a
liquefied petroleum plant, a hydro power plant, and a solar plant
are under consideration. The list includes a mix of French,
Chinese, Indian, and other developers, but no U.S. firms. These
developers are scheduled to receive requests for proposals at the
end of November. The final bids would close in May 2009 and deals
would be concluded in the first quarter of 2010. Meanwhile,
Independent Power South Africa (IPSA) announced that it was in
advanced discussions to sell four gas turbines, previously intended
Qadvanced discussions to sell four gas turbines, previously intended
for its Coega project, near Port Elizabeth. IPSA said it was still
committed to developing a 1,600 MW combined cycle gas turbine plant
there, but delays in implementation of the project forced it to
release turbines it had committed to acquire. (Engineering News,
October 24, 2008)

-----------------------------------------
Sasol Seeks Greater Upstream Independence
-----------------------------------------

11. (U) Petro-chemical giant Sasol has shifted its strategic
emphasis from downstream gas-to-liquids (GTL) and coal-to-liquids
(CTL) processing to discovery, development, and possible acquisition
of natural gas reserves, note analysts. This could indicate an end
to the Sasol-Chevron joint venture, formed in 2000 to combine
Chevron's access to gas reserves with Sasol's ability to "monetize"
stranded gas assets. The venture has seemingly failed to live up to
expectations, having delivered few opportunities for GTL. In fact,
the first commercial plant has been developed by Sasol in
partnership with Qatar Petroleum, rather than Chevron, while Chevron

PRETORIA 00002390 004.2 OF 004


is whittling down its stake in its Nigerian joint venture. Sasol's
ambitious three-year capital expenditure program of $700 million
probably includes a "war chest" for upstream acquisition. In recent
months, Sasol has acquired assets in Australia, Mozambique, Gabon,
and Papua New Guinea. Sasol has started drilling offshore of
Mozambique and it has been awarded a new block immediately west of
the successful Temane and Pande blocks. Sasol CEO Pat Davies said
Sasol needs "to get our hands on more and more gas resources so that
we can build these integrated GTL projects in various parts of the
world into our future." He also stressed that the group is
confident of its ability to deploy GTL, arguing that ramp-up
problems are under control and the $1 billion plus Oryx GTL plant in
Qatar is at hand. (Engineering News, October 24, 2008)

-----------------------------------
Rehabilitating Defunct Mines Proves
Costly for DME
-----------------------------------

12. (U) Department of Minerals and Energy (DME) Chief Director of
Economic Analysis Tseko Nell said this week that "Despite the
economic gains derived from the mining industry, mining activities
have also resulted in disastrous environmental acts." Nell noted
that mining is the leading generator of solid waste, and that the
waste generated by mining has a direct and indirect impact on air,
biological resources, and land. The DME is spending millions of
rand to rehabilitate and manage derelict South African mines to
which no owners lay claim. Nell said the DME has commissioned the
Council for Geo-Science to develop a national strategy to manage
abandoned mines. The strategy is aimed at developing and
maintaining a database of the mines, and will also rank the mines in
the order of their potential to have an impact on the environment,
health and safety of the local communities. Nell also noted that
DME is in the process of developing a strategy for regional mine
closures. (Mining Weekly October 24-30, 2008)

LA LIME

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