Cablegate: South Africa Economic News Weekly Newsletter November 7,

DE RUEHSA #2469/01 3121201
R 071201Z NOV 08




E.O. 12958: N/A
2008 ISSUE

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1. (U) Summary. This is Volume 8, issue 45 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Reserve Bank: Crisis Hurts South Africa
- Manufacturing Activity Slows Down
- More Pain for House Sellers
- Ford Motor Company Executive Points to Inferior
Infrastructure, High-Priced Utilities, and Labor
Disruptions as Obstacles to Global Competitiveness
- Worst Car Sales Picture Since '94
- Bilateral Trade and the President-Elect
- ANSAC Settles Cartel Case - The End of the Soda Ash Saga
- Hyundai Hopes to Leverage World Cup Sponsorship
- August Arrivals Data Reflect Global Slowdown
- Blackouts Loom in 2009 as Electricity Saving Fails
- Political Nuclear Meltdown
- Companies Set Aside Land to Preserve Grasslands

End Summary.

Reserve Bank: Crisis Hurts South Africa

2. (U) The local economy cannot expect to be immune from the global
financial turmoil, reports the South African Reserve Bank's (SARB)
latest Monetary Policy Review (MPR). The SARB believes its own
policymaking may be complicated "for some time" as a result of the
financial crisis. One of the consequences of the financial turmoil
has been a decline in commodity prices, reported the SARB. "From a
narrow inflation perspective this means that one of the biggest risk
factors to the inflation outlook has subsided significantly," it
said. According to the SARB, this factor, in conjunction with the
widening output gap and subdued household consumption expenditure,
indicates some of the pressures on inflation "may be abating."
However, another risk has emerged in the form of the rand exchange
rate which, along with other emerging-market currency exchange
rates, has been negatively affected by the global turmoil. "The
impact of the exchange rate on the inflation outlook will depend, to
a significant degree, on the extent to which these new levels are
sustained," said the SARB. While inflation is set to return to the
3%-6% range in the second quarter of 2010, the SARB said that in a
world of "heightened turmoil and uncertainty," the risks to the
outlook are "amplified." The SARB reiterated, "Monetary policy will
continue to focus on the expected medium-term inflation outcomes and
will act appropriately to ensure that inflation returns to within
the inflation target range over a reasonable time frame." (I-Net
Bridge, November 5, 2008)

Manufacturing Activity Slows Down

3. (U) South Africa's purchasing managers index (PMI) dipped from
47.7 index points in September to 46.2 index points in October, said
PMI sponsor Investec. The latest PMI, a measure of the country's
underlying manufacturing activity, reflected the challenging
economic environment facing producers partly due to slowing domestic
demand. "Not only is domestic demand slowing, but there is
increasing evidence of further moderation in growth by our most
important trading partners," said Investec Asset Management
Portfolio Manager Mokgatla Madisha, adding that interest rate hikes
and higher inflation are weighing on domestic demand. Madisha added
Qand higher inflation are weighing on domestic demand. Madisha added
the PMI could fall further over the next six months as the bleak
outlook for the world economy pushes the recovery in the index
further into the future. (Beeld, November 5, 2008)

More Pain for House Sellers

4. (U) South African house prices decreased by 2.5% year-on-year
(y/y) in October, as demand for property remained depressed, a
Standard Bank property survey showed. "The reduced affordability of
housing, exacerbated by higher mortgage rates, high food and fuel

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prices and a slowing economy, led to a decline in the demand for
residential property and a substantial softening in house price
growth," Standard Bank said in a statement. Standard Bank said the
housing sector would likely remain under pressure until the second
quarter of 2009. Economists expect interest rates to start falling
in the first quarter of 2009 after the targeted CPIX inflation (CPI
less mortgage interest) slowed for the first time, from a record
high of 13.6% in August 2008 to 13% in September. (Fin 24, November
5, 2008)

--------------------------------------------- -----
Ford Motor Company Executive Points to Inferior Infrastructure,
High-Priced Utilities, and Labor Disruptions as Obstacles to Global
--------------------------------------------- -----

5. (U) Ford Motor Company EVP for Asia Pacific and Africa John
Parker told an audience at the Johannesburg International Motor Show
on November 5 that protectionism and high labor costs were the
reasons why South Africa's motor industry had higher production
costs than countries like India, China and the ASEAN countries. He
said that while South Africa's Motor Industry Development Program
was necessary, the protection it provided was largely responsible
for the country's higher production costs. He also noted that South
Africa's labor costs were seven times the average wage in Thailand,
while GDP per capita was only 20 percent higher in South Africa.
Parker warned that South Africa could not continue to protect its
motor industry in the long term and still be globally competitive.
He said that Ford also needed to work with labor to increase the
efficiency and productivity of its work force. A key area where
productivity needs to improve is the country's ports, which are
among the world's costliest and least efficient. "South Africa's
ports are nearly five times the cost of Thailand's Laem Chabang
port, yet deliver on average one-fourth of Laem Chabang's
productivity," he said. Inferior infrastructure that creates
inefficient logistics systems, high-priced utilities that still do
not guarantee supply, and frequent labor disruptions that cost auto
makers in precious downtime - all contribute to an environment of
higher operating costs and greater uncertainty," he said. (Business
Report, November 6, 2008)

Other Ford executives noted that Mercedes, BMW and Toyota have
already found a way to become globally competitive in South Africa,
but that Ford had not yet reached that level of productivity.
Ford's January 2008 announcement of a planned $150 million
investment to produce the company's next-generation, T-6 pick-up in
Silverton, Pretoria and the Puma diesel engine in Struandale, Port
Elizabeth is part of the company's overall plan to become globally
competitive by increasing production volumes to improve economies of
scale and raising local content to reduce transport costs. Another
part of the plan is to find a more efficient and productive way of
working with the labor force. The same executives noted that while
progress had been made in recent negotiations with the union, more
progress needs to be made.

Worst Car Sales Picture Since '94

6. (U) According to the National Association of Automobile
Manufacturers of South Africa (NAAMSA), new vehicle sales
deteriorated further in October, plunging by more than 30% to 54,569
units compared with the same month last year. This is the worst car
sales month on a year-on-year basis since September 1994. NAAMSA
said sales for the first ten months of the year were 19% lower than
the same period last year. NAAMSA attributed the substantial fall
to higher-than-average new vehicle price increases in recent months
and the extraordinary loss of confidence in global financial markets
in recent weeks. T-Sec Chief Economist Mike Schussler said car
price rises in light of a weak rand mean that sales will not recover
quickly. "It is a bad period here for car sales. We should not have
interest rates this high at this time," said Schussler. (I-Net
Bridge, November 4, 2008)

Bilateral Trade and the President-Elect

7. (U) The South African government anticipates that Barack Obama's

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election will provide a boost for trade between Africa and the US.
The cabinet released a statement saying that Obama's election will
lay a "solid foundation for the redefinition of America's relations
with the rest of the world," while Department of Trade and Industry
(DTI) Director General Tshediso Matona told the media that the South
African government was planning to up the ante when it came to
negotiating trade agreements and that it was setting a "lot of
store" by the Obama win. Referring to South Africa's position on
global free trade talks, Matona said that the country was committed
to returning to them when the conditions were right, and that this
was perhaps the opportunity to do so. This is, of course, provided
that the new administration in the US does not adopt a more
protectionist stance than the outgoing administration had. "We will
be watching closely," says Matona, who is confident that the Obama
win will boost the outlook for bilateral trade. (Fin 24, November 6,

ANSAC Settles Cartel Case -
The End of the Soda Ash Saga
8. (U) The American Natural Soda Ash Corporation (ANSAC), a U.S.
industry body that had been accused of organizing its members as an
export cartel, effectively admitted to antitrust violations and
agreed to withdraw from the South African market. ANSAC reached a
settlement with the Competition Commission, bringing to an end the
longest-running case in the Commission's history. ANSAC admitted
that its membership agreement had eliminated price competition
between its members in export sales in contravention of the
Competition Act. ANSAC agreed to stop export sales to South Africa
within six months of the confirmation of the agreement and to "make
modifications" for members to individually sell into South Africa.
ANSAC will pay a R9.7 million ($1 million) fine, which amounts to 8%
of its annual turnover in South Africa. The corporation also agreed
to pay the legal expenses of soda ash producer Botswana Ash
(Botash), which brought the initial complaint.
It is believed the costs of the case, which dragged on for almost 10
years, were likely to match the size of the fines. ANSAC President
John Andrews explained this week that the South African soda ash
market was no longer attractive given the costs of the case and the
availability of other profitable markets. ANSAC could return to the
South African market if the DTI designates the soda ash industry as
"strategic." Such a designation would allow ANSAC to obtain an
exemption from competition challenge. ANSAC is a group of companies
that coordinate efforts in export markets.
The collaborative arrangement is authorized in terms of the U.S. Web
Pomerene Act, which allows for such arrangements in export markets,
but prohibits them at home. Competition Tribunal Chairman David
Lewis recommended that the settlement be posted on the International
Competition Network's website and be referred to other countries,
such as Brazil, Korea and Mexico, "similarly beset by having to deal
with ANSAC". (Business Day, November 5, 2008)
Hyundai Hopes to Leverage World Cup
QHyundai Hopes to Leverage World Cup

9. (U) Hyundai Automotive South Africa showcased its luxury Universe
Express bus, which it hoped would play a big part in transporting
teams during the 2010 FIFA World Cup. Hyundai contributed $100
million towards the World Cup to secure its place as an official
partner. Hyundai Africa and Middle East General Manager Young Cho
said the company saw its sponsorship as an opportunity to upgrade
its brand image, since it was one of the newest entrants to the
market in South Africa. Hyundai commercial vehicles entered the
South African market about five years ago. The Universe Express was
on display at the Johannesburg International Motor Show. The South
African Department of Transport recently issued a tender for 1,422
buses, which it would require for operation during the games. Of
these, 210 would be luxury buses. The results for the tender
process are expected in January. "We have tendered and are
confident we will get our share," said Cho. The company boasted
that production lead time of the luxury coach was three months -
including shipping. (Engineering News, October 31, 2008)

August Arrivals Data Reflect Global Slowdown

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10. (U) South African tourist arrival statistics for August 2008
revealed decreases across all major source markets, with Far East
markets dropping the most. South African Tourism (SAT) Chief
Operations Officer Didi Moyle blamed the drastic decreases on a
global tourism slowdown related to the global economic crisis. "The
good first quarter we had in 2008 was based on travel that was
booked in 2007. What has been happening since then month-by-month
is that the market is slowing and for the first time in August there
was an actual decline. It is at this time in the cycle that we
generally lift from the low season (May to July). This didn't happen
this year," said Moyle. Asian markets accounted for the most
significant decreases in August monthly figures. The Chinese source
market decreased by 47.5% y/y and the Japanese market dropped by 17%
y/y for August arrivals. The Asian markets were also the first to
show declines this year with a poor July performance. "When there
is a crisis - particularly of an economic or financial one - the
Japanese stop traveling very quickly. In the USA and Europe the lead
times are longer," said Moyle. The key source markets for
international arrivals in August were:

UK, down 7.9% from 36,426 to 33,562
USA, down 10.1% from 28,760 to 25,845
Germany, down 15.9% from 16,071 to 13,510
France, down 5.8% from 11,836 to 11,155
Italy, down 4.6% from 10,998 to 10,494
The Netherlands, down 10.4% from 10,061 to 9,019
Australia, up 1.7% from 8,578 to 8,722
Spain, down 3.3% from 5,672 to 5,487
India, down 7.2% from 5,202 to 4,827
Canada, little difference from 4,104 to 4,012

(Travel Hub, November 6, 2008)

Blackouts Loom in 2009 as
Electricity Saving Fails

10. (U) South Africa may face fresh power cuts early in 2009
because voluntary energy savings have fallen "woefully" below the
required 10%, new Minister for Public Enterprises Brigitte Mabandla
said. State-owned utility Eskom has been rationing electricity
since January, when the national grid nearly collapsed. Mabandla
said savings on a voluntary basis were only 2%, well short of the
10% efficiency correction needed to provide the necessary reserve
margin to stabilize the system. "Should the necessary savings
levels not be achieved, then the risk of load-shedding to prevent
system-wide blackouts increases massively going into 2009 and
beyond." Under the new program, she said, consumers using more than
the required limit of 90% of their normal power requirements would
face tariff penalties. Mabandla noted Eskom had made progress on
reducing unplanned outages since last January 2008 and had increased
coal stockpiles to a conservative 30 days across power stations. On
the decision between Westinghouse and Arevea for new nuclear build,
Mabandla said, "no final decision has been made. The real challenge
that we have to overcome is the capital cost of the nuclear build
relative to the cost of a coal build." (Sunday Times, Engineering
News, November 2, 2008)

Political Nuclear Meltdown

11. (U) South Africa's trillion-rand "nuclear renaissance" hangs
Q11. (U) South Africa's trillion-rand "nuclear renaissance" hangs
in the balance as funding problems and political indecision bite
into the Mbeki administration's grand design for a fleet of new
nuclear power stations and a full-scale support industry. Eskom has
missed deadlines - most recently during the week former President
Thabo Mbeki was ousted - to decide on a preferred bidder for
"Nuclear 1", a new-generation conventional power station. Press
reports note Eskom has asked the bidders Areva and Westinghouse to
be patient until December, after delays over the course of 2008. An
energy analyst said, "As far as I know the number one reason it
keeps getting deferred is money." A further factor was "the new
guys taking over from the old and not liking the decisions of the
old." Compounding matters is access to finance and Eskom's
downgraded credit ratings. Eskom has formally applied to the
Treasury to guarantee its capital expansion-related debt. (Mail &

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Guardian, October 31, 2008)

--------------------------------------------- -
Companies Set Aside Land to Preserve Grasslands
--------------------------------------------- -

12. (U) Eight South African forestry companies have allocated
45,000 hectares of grasslands at 37 Mpumalanga and Kwa-Zulu Natal
(KZN) sites to be declared nature reserves or protected land.
Within each area categorized as grasslands, there could be hundreds
of species with extensive, old root systems, said Grasslands Program
official Steve Germishuizen. Germishuizen noted South African
grasslands have been overlooked or mistreated for a long time.
According to Germishuizen, farmers have ploughed over them,
foresters have planted them with alien species, and commercial
development has encroached upon them. The recently established
Grasslands Program is meant to help increase the number of protected
grasslands, especially the "mist belt grasslands" in KZN and
Mpumalanga provinces, where agriculture and forestry industries
threaten them. Germishuizen said that the Grasslands Program will
work with the provincial conservation agencies and tribal
authorities on the 37 sites to improve grassland management capacity
and protect the native species. (Pretoria News, October 27, 2008)

© Scoop Media

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