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Cablegate: South Africa Economic News Weekly Newsletter November 14,

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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 NOVEMBER 14,
2008 ISSUE

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1. (U) Summary. This is Volume 8, issue 46 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:

- Standard & Poor's Dim View of Rand, Rates
- JSE Out of Favor, But Not Africa
- The Final Frontier: Nando's Opens a Fast-Food Restaurant
in Washington
- Newly Enlarged Delta to Improve and Expand Africa Service
- Vodafone Deal Expected to Unleash Expansion Shackles for
Telkom and Vodacom
- Build ICT Infrastructure and They will Come
- Eskom Dialing for Dollars - AfDB and World Bank Loans
- Renewable Energy: Bold Targets, Little Progress
- Miners Face Huge HIV/AIDS Challenge
- Xstrata-Merafe Venture Shuts Six Furnaces - Cuts Output
by 29% - and Improves South Africa's Electricity Reserve
Margin
- Ivory Sales Fetch Millions in Revenues

End Summary.


-----------------------------------------
Standard & Poor's Dim View of Rand, Rates
-----------------------------------------

2. (U) Standard & Poor's (S&P) revised its outlook on South Africa's
sovereign credit rating from "stable" to "negative," warning that
capital outflows could depress the rand more, keeping inflation high
and delaying expected cuts in interest rates. The decision followed
a similar step by Fitch Ratings Agency earlier this week, adding to
concern that fallout from the global financial crisis may lead to a
downgrade to South Africa's investment-grade credit ratings.
Treasury Director General Lesetja Kganyago described the news as
"disappointing" and a reminder that South Africa should stick to the
prudent fiscal policies which have supported its credit rating at a
time when other countries are being downgraded. S&P pointed out
that if South Africa kept its commitment to growth-enhancing reforms
and prudent fiscal policies after the election, this would support
its rating. S&P affirmed its BBB+ rating for South Africa's foreign
currency debt, and said local banks should weather the domestic
slowdown well, as they had limited exposure to the global credit
crunch. But at the same time, Fitch revised its outlook for three
of South Africa's biggest banks, ABSA, Investec and Nedbank, from
"stable" to "negative." Experts regarded the downgraded outlook for
the banks as inevitable given Fitch's revision to the country's
rating outlook. Fitch said the step reflected "a deteriorating
macro economic environment and its anticipated impact on the
financial performance and financial position of the banks." Banking
Association Head Cas Coovadia described the outlook revision as
"ridiculous." But banking stocks fell in response to the news and
followed a further plunge in global equity markets. (Business Day,
November 11, 2008)

---------------------------------
JSE Out of Favor, But Not Africa
---------------------------------

3. (U) Foreign investors may be dumping South African equities for
US bonds, but the outside world is far from turning its back on
Africa as a whole. Stanlib Director of Global Investment Marketing
Dylan Evans said that anyone who followed the money would have
witnessed a growing flight from South Africa, yet foreign direct
investment (FDI) in the rest of Africa remained remarkably robust.
Qinvestment (FDI) in the rest of Africa remained remarkably robust.
"During the first 22 days of October, foreigners sold a net R22.6
billion ($2.1 billion) of South African equities, the largest
monthly sell-off by foreigners ever recorded," said Evans. From
January through October, foreigners sold a net R43.7 billon ($4.1
billion) compared with last year when they bought a net R64.1
billion ($6.1 billion) of South African equities and a net R220
billion ($21 billion) of inflows between 2004 and 2007. The
dramatic acceleration of foreign equity sales and some bond sales
had weakened the rand, making it the worst-performing
emerging-market currency this year. Over the same period, the
Johannesburg Stock Exchange (JSE) lost about 30% of its value in
rand terms and 58% in dollar terms. Evans said that elsewhere in
Africa things were looking rosy, with a total of R328 billion

PRETORIA 00002515 002.2 OF 005


($31.3) in FDI flowing into Africa in the 12 months to September.
Head of Pension Reform Strategy at Liberty Corporate Benefits Baron
Furstenburg said the recent flight of foreign investors from South
African equities and bonds had drawn attention to the need for this
country to supplement "hot money" from offshore fund managers with
long-term domestic capital. (Business Times, November 9, 2008)

------------------------------------
The Final Frontier: Nando's Opens
a Fast-Food Restaurant in Washington
------------------------------------

4. (U) South Africa's Portugese-style chicken chain Nando's has
opened its first U.S. restaurant in Washington, D.C. Nando's is
expanding its international operation and now has 800 restaurants in
more than 26 countries. Nando's CEO Kevin Utian said the US market
was ready to embrace the brand and its "unique taste, flavor and
positioning." Utian said the group was looking at further expansion
in Africa and across the globe but was doing so conservatively by
opening restaurants one-at-a-time in different countries after
studying the markets there. He said Nando's, which is 60% owned by
its franchisees and employs 7,000 people in South Africa, was facing
the problems of slowing economies, market volatility, food
inflation, and rising product costs. "Debates on the readiness of
US markets, who are renowned mass consumers, to receive a
traditional food offering such as ours, have continued for years,"
Nando's co-founder Robert Brozin said. He said the branch in
Washington was a milestone for the brand. Brozin said the consumer
response to date had been "terrific." He said Nando's, which
celebrated its 21st birthday on Friday, had always had a vision of
expanding into the US. Brozin commented that even at the beginning
of his venture, he believed that he could build "a global brand...
the growth of the Nando's business over a mere 21 years has been
phenomenal and now we've tackled the final frontier. Washington DC
is our first step into the U.S. and we're positive that Nando's will
be well received." Today the brand has stores across South Africa,
the United Kingdom, Canada, Australia, and New Zealand. It also
operates in Israel, Malaysia, Pakistan and India. South Africa
remains Nando's cash cow with about 280 stores, followed by the UK
with about 175. There are a similar number in Australia and New
Zealand. (Business Day, November 11, 2008).


-----------------------------------
Newly Enlarged Delta to Improve and
Expand Africa Service
-----------------------------------

5. (U) Delta Airlines announced that it will replace its current
flight from Johannesburg to Atlanta via Dakar with a daily non-stop
service. The airline is upgrading the aircraft used on the route and
plans to operate the new service with a Boeing 777-200LR aircraft
beginning June 2, 2009. The aircraft is among the newest in Delta's
fleet and features its 180-degree full flatbed in the Business Elite
class. Delta will be the first U.S. airline to offer non-stop
roundtrip service between South Africa and the United States. This
announcement forms part of a Delta's global expansion announced on
November 11. Delta became the world's largest airline after its
QNovember 11. Delta became the world's largest airline after its
merger with Northwest. The expansion includes 18 new trans-Pacific
and trans-Atlantic routes in 2009 allowing the airline to provide
service to nearly all of the world's major travel markets. The
Boeing 777-200LR features a two-class service with up to 276 seats -
43 Business Elite seats and 233 seats in economy. Delta is the
leading airline connecting Africa to the U.S and has unveiled plans
to rapidly expand in Africa next year. By June 2009, Delta will be
the only carrier to offer service between North, East, South, and
West Africa and the United States and (subject to government
approvals) will operate from 12 cities in 10 African countries. In
addition to the non-stop Johannesburg flight, Delta will fly between
Nairobi and Atlanta via Dakar (four times a week), Monrovia and
Atlanta via Cape Verde (once weekly), Abuja and Atlanta via Cape
Verde (twice weekly), Luanda and Atlanta via Cape Verde (twice
weekly), Malabo and Atlanta via Cape Verde (once weekly) and Lagos
and New York (non-stop, five times a week). (Delta Airlines Press
Release, November 12, 2008)

-----------------------------------------
Vodafone Deal Expected to Unleash
Expansion Shackles for Telkom and Vodacom

PRETORIA 00002515 003.2 OF 005


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

6. (U) UK-based Vodafone's acquisition of a further 15% stake of
mobile-operator Vodacom will result in over R20 billion ($2 billion)
in foreign direct investment into the South African economy and
facilitate another significant listing on the JSE - that of Vodacom
- at a time when global markets are tumbling and the South African
current account deficit threatens to increase. State-controlled
Telkom, which owned 50% of Vodacom, will receive the acquisition
price of R22.5 billion ($2.3 billion) minus debt of about R1.55
billion ($155 million). The South African government and the Public
Investment Corporation, which own a combined 58% of Telkom, will
vote in favor of the transaction and will become significant
shareholders in Vodacom. Telkom will retain half of the Vodafone
money. The other half will be distributed to shareholders as a
special dividend. Vodafone's holdings in Vodacom will increase from
50% to 65%. Telkom's remaining 35% stake in Vodacom will be
distributed to shareholders via a JSE listing of Vodacom. Telkom
CEO Reuben September said Telkom would be free to compete, to expand
geographically, and to bring fixed and mobile services to customers.
Telkom is expected to either create a mobile service to complement
its fixed-line operations or enter into partnership with Cell C
since the South African mobile market is already saturated. Telkom
had previously looked to Vodacom to converge fixed and mobile
offerings to customers, but this had not materialized. Telkom was
also bound by a restrictive shareholders' agreement with Vodafone.
"We have realized that being married to a competitor, however
lucrative, is not a bond made in heaven," September said. Now that
Telkom has been freed from its shackles, the challenge will be to
show that it can expand and diversify on its own. For Vodacom, the
deal relieves it from the restrictions of having joint controlling
shareholders with restrictive agreements in place. It can also
extend its expansion in Africa except into countries where Vodafone
already has a presence (Ghana and Kenya). Vodafone has agreed to
keep the Vodacom brand alive for the African expansion creating a
boon for Vodacom's South African Black Economic Empowerment (BEE)
partners. (Business Times, November 9, 2008, Business Day, November
7, 2008, and Engineering News, November 8, 2008)

-------------------------------------------
Build ICT Infrastructure and They will Come
-------------------------------------------

7. (U) SEACOM President Brian Herlihy told the press that the
prospect of SEACOM landing a 15,000 kilometer fiber-optic, undersea
cable on South Africa's shores next year has forced broadband prices
down by 90%. The SEACOM project will be the first undersea cable to
connect East Africa to the rest of the world through links to India,
England, and France. Herlihy noted that when SEACOM announced its
intention to launch the $600 million undersea cable project,
operators in South Africa were pricing broadband at R8,000 ($800)
per megabit per month and that prices have now dropped as low as
R800 ($80) per megabit per month. "We have created competition
QR800 ($80) per megabit per month. "We have created competition
before we even landed the cable," said Herlihy. SEACOM plans to
reduce these prices again when it enters the market in June 2009
with a price of R435 ($43) per megabit per month. The SEACOM cable
is well into its production stage -- just last week it broke ground
in Maputo for the Mozambique landing station, which follows similar
developments in Mombassa, Kenya. He said the project is set to
begin construction of the South African and Tanzanian landing
stations by next month. Besides South Africa, Mozambique, Kenya and
Tanzania, the SEACOM cable will also link to Madagascar, Ethiopia,
and Egypt. Nearly 90% of the SEACOM cable has been manufactured and
the first load of assembled cable and repeaters has been loaded on a
Tyco Telecommunications' ship for installation. The second ship
will reach Africa in early 2009. The project is 76.25%
African-owned, with South Africa's Shanduka Group (12.5%), Venfin
Limited (25%), Convergence Partners (12.5%) and Kenya's Industrial
Promotion Services (26.25%) all on board. The remaining 23.75% is
owned by Herakles Telecom, part of the New York-based Blackstone
group. "With only eight months to go before the system is ready for
service, SEACOM remains set to become the first cable to connect
East and Southern Africa to the rest of the world with plentiful and
inexpensive bandwidth," emphasized Herlihy. He said a simple
calculation shows that South Africa needs about 50 gigabits of
international capacity to service the one million broadband
subscribers in the country, but currently has only 10 gigabits.
"International capacity has been choking the data market in Africa
for years now," added Herlihy. Initially SEACOM will deliver 80

PRETORIA 00002515 004.2 OF 005


gigabits of international capacity through its cable but can meet
more demand easily because the cable has a potential capacity of
1.28 terabits (1,280 gigabits). SEACOM has already sold two-thirds
of the initial 80 gigabits capacity. In South Africa, SEACOM has
had to partner Neotel for the landing station because only Neotel,
Telkom, or Sentech are licensed to lay undersea cables. Herlihy
noted that because of South African politics, SEACOM had to work
with a partner such as Neotel to land the cable, unlike in Tanzania
and Kenya where it has set up licensed local subsidiaries. He says
that although SEACOM partnered with Neotel to land the cable, the
international capacity will be sold using an open-access model so
that any operators can buy capacity from SEACOM. (Mail & Guardian,
November 7-13, 2008)

----------------------------
Eskom Dialing for Dollars -
AfDB and World Bank Loans
----------------------------

8. (U) State-owned electricity producer Eskom signed a R4.9 billion
($500 million) 20-year loan with the African Development Bank (AfDB)
as part of its capital-raising plans to fund its R343 billion ($35
billion) investment program. Eskom also announced that it had
secured a further Euro 300 million ($376 million) from the European
Investment Bank. Eskom said that since April it had received debt
commitments of R19 billion ($1.8 billion), but still needs R11
billion ($1 billion) by the end of next March to keep the funding to
expand its power generation and distribution on track. The National
Treasury confirmed that Eskom and the World Bank have entered into
talks about a $5 billion loan. Eskom CEO Bongani Nqwababa said that
because of the global financial crisis, Eskom would wait six to 12
months before starting to raise fresh cash. (Engineering News,
Business Report, Times, Business Day, November 11, 2008)


--------------------------------------------- --
Renewable Energy: Bold Targets, Little Progress
--------------------------------------------- --

9. (U) World Wildlife Fund South Africa hosted a National Renewable
Energy Conference in Johannesburg November 6-7. The conference
garnered civil society and private sector interest in renewable
energy as a way to mitigate power shortages and reduce the country's
carbon footprint. The U.S. Department of Energy (USDOE) presented
information on adopting green building codes. The 1998 South
African government white paper on energy policy called for renewable
energy to comprise 5% of total energy consumption by 2013, but
progress has been slow. Participants at the conference called for
an even higher renewable energy target of 15%. The Darling wind
farm in the Western Cape powered up on November 7, becoming South
Africa's first significant renewable energy power initiative. The
wind farm delivered 5.2 megawatts (MW) of energy to the power grid.
Eskom hopes to establish a demonstration plant for a 100 MW solar
concentrating tower in the Northern Cape, with interest from U.S.
firm SolarReserve to provide the technology. The Department of
Minerals and Energy and the Development Bank of Southern Africa have
established a $8.3 million renewable energy market transformation
Qestablished a $8.3 million renewable energy market transformation
program to assist investors in overcoming obstacles preventing
growth in the sector. An energy consultant noted that little
progress has been made in the development of renewable energy
projects to date because of regulatory uncertainty and unclear
incentives. The electricity regulator NERSA is expected to finalize
feed-in tariffs for renewable energy by February which would clarify
the investment environment. (Mail & Guardian, Engineering News,
Business Day, November 11, 2008)

-----------------------------------
Miners Face Huge HIV/AIDS Challenge
-----------------------------------

10. (U) A recent South African Business Coalition Against HIV/AIDS
conference focused attention on the effect of HIV/AIDS on the
production and well-being of mining workers and families.
Benchmarks Foundation estimates that about 16-30% of mine workers
are infected with HIV/AIDS. Benchmarks researcher David van Wyk
said it is difficult to determine exact HIV/AIDS prevalence rates
because the majority of workers are resistant to participating in
HIV voluntary testing programs. Mining employees are afraid to
disclose their status because they fear discrimination,

PRETORIA 00002515 005.2 OF 005


stigmatization, and punishment or penalization for a lack of
productivity. Mining supervisors are alleged to be unsupportive of
the HIV/AIDS- stricken and likely to punish sick workers. One
expert said most mining companies have good voluntary testing and
counseling programs, but infected mine workers do not seek
antiretroviral treatment because of the potential for retribution
from employers. (Business Day, November 11, 2008)


--------------------------------------------- --
Xstrata-Merafe Venture Shuts Six Furnaces,
Cuts Output by 29%, and Improves South Africa's
Electricity Reserve Margin
--------------------------------------------- --

11. (U) The world's largest ferrochrome producer Xstrata-Merafe
Resources halted six of its South African ferrochrome furnaces
because of slowing global demand and competition from major steel
and iron ore producers. The six furnaces represent 500,000 tons (or
29%) of the world's annual ferrochrome production. Ferrochrome is
used mainly in the production of steel. Xstrata said the shutdown
is temporary and it expects to redeploy personnel within its
operations. Xstrata also announced that the closures of the
highest-cost furnaces would result in energy savings of 300-400 MW
of power and thereby contribute to easing the power crisis. This
contribution represents about 10% of state power company Eskom's
electicity savings reduction target. (Mining Weekly, Business
Report, November 11, 2008)

--------------------------------------
Ivory Sales Fetch Millions in Revenues
--------------------------------------

11. (U) South African National Parks (SANP) auctioned 6.51 tons of
government-owned elephant ivory in November. The Convention on
International Trade in Endangered Species (CITIES) approved the
sale. The sale fetched over $6.7 million. SANP CEO Dr. David
Mabunda said SANP would use a significant amount of the funds
amassed to "stamp down on poaching of any kind", and would also
direct parts of the funds to elephant-related research, general
conservation, buying more land, and employing additional park
rangers. The SANP conducted the auction in Pretoria. Buyers
included 12 Chinese and 22 Japanese nationals who bid off of
brochures depicting the ivory lots. The day before the sale, the
bidders viewed the lots at Kruger National Park, where the ivory was
stockpiled. Botswana, Namibia and Zimbabwe held similar auctions.
According to CITES General Secretary Willem Winjnstekers the four
countries auctioned a total of 101 tons of ivory. The four sales
generated nearly $15 million in revenues. The International Fund
for Animal Welfare was opposed to the sales. Opponents of the sales
argued the revenues from the sales would not make any significant
impact on poaching, and might stimulate the demand for ivory.
(Pretoria News, November 17, 2008 and www.iol.co.za November 6,
2008)

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