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Cablegate: South Africa Economic News Weekly Newsletter December 12,

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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 DECEMBER 12,
2008 ISSUE

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1. (U) Summary. This is Volume 8, issue 50 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:


- Manufacturing Outlook Bleak
- South African Economy Shows Resilience
- Customs Officials Seize 60 Tons of Illegally Imported
Clothing
- Tourism Slumping
- SAA Safety Gets Thumbs Up From FAA
- Eskom Terminates Nuclear 1 Procurement Process, but South
Africa Still Committed to Nuclear
- PetroSA Appoints KBR as Engineering Contractor for
Proposed Coega Refinery
- SADC Launches New Science and Technology Desk

End Summary.

---------------------------
Manufacturing Outlook Bleak
---------------------------

2. (U) Manufacturing production declined by 1.6% year-on-year (y/y)
in October. Stanlib Economist Kevin Lings said that the
manufacturing sector is under enormous pressure, which would
intensify in the quarters ahead. A drop-off in residential housing
activity, a decline in consumer spending, and sluggish world demand
are all likely to work against manufacturing activity over the next
six to 12 months. Lings expects the weak exchange rate, the
increased expense of manufactured imports, and the public sector
infrastructure program to offset some of the domestic economic
conditions, but these factors are unlikely to be sufficient to
offset a general slump in manufacturing activity. Most analysts
expect the manufacturing sector to slip into a technical recession
in the fourth quarter of 2008. Efficient Group Economist Doret Els
said the outlook for the manufacturing sector should be a trade-off
between improved export potential (due to the weaker rand) and
dampened demand. (I-Net Bridge, December 10, 2008)

--------------------------------------
South African Economy Shows Resilience
--------------------------------------

3. (U) The South African Reserve Bank's quarterly bulletin reports
that the South African economy weathered stormy conditions in the
third quarter of 2008. Despite the global financial turmoil in the
third quarter and the consequent steep fall in equity and commodity
prices, final domestic demand grew by 3.1% quarter-on-quarter (q/q)
from 1.4% q/q in the second quarter. This growth was despite the
first contraction in household consumption expenditure since the
fourth quarter of 1998, as both fixed capital formation and
government consumption expenditure increased in the third quarter
relative to the second quarter. This resilience was not confined to
the domestic sector, as exports grew by 3.2% q/q in the third
quarter despite the slowing in global demand. The balance of
payments surplus grew from R5.7 billion ($570 billion) in the second
quarter to R7.8 billion ($768 million) in the third quarter.
Overall, the economy grew by 4.3% year-on-year in the first nine
months if measured from the expenditure side. The growth is well
ahead of the government's forecast of 3.7% growth for the full year
and the consensus forecast of 3.2% of private sector economists.
(Beeld, December 11, 2008)

----------------------------------
Customs Officials Seize 60 Tons of
Illegally Imported Clothing
----------------------------------
Q----------------------------------

4. (U) South African Revenue Service (SARS) officials seized 60 tons
of clothing that were illegally imported from China and shipped to
South Africa through Botswana. SARS spokesman Adrian Lackay said
the goods were to be sent to three large retailers, but he would not
disclose the value of the seized goods or the names of the
retailers. The retailers were not implicated in the fraud, but,
Lackay noted, "This is a worrying trend. Some retailers, in their
pursuit of the cheapest goods, are not vetting their suppliers
properly, otherwise they would pick up the anomaly in the value and

PRETORIA 00002706 002.2 OF 003


price of goods." The seizure comes just after the Department of
Trade and Industry (DTI) expressed concern over "massive and
systemic" fraud involving clothing imports from China. SARS reports
that while textiles and apparel worth R15.3 billion ($1.4 billion)
were exported from China to South Africa in 2007, invoices reflected
imports worth only R6.1 billion ($597 million), a shortfall of 60%.
SARS officials believe that importers are masking the country of
origin by re-labeling and re-routing goods through third countries
in order to bypass the quotas on imports of Chinese clothing and
textiles. The recent 93% increase in clothing imports from Zimbabwe
can only be explained by transshipment, say trade experts. SARS has
vowed to intensify their crackdown this month by targeting South
Africa's borders with Lesotho, Botswana and Namibia and placing
unlawfully imported goods under forfeiture. (Tralac Newsletter,
December 10, 2008)

----------------
Tourism Slumping
----------------

5. (U) The total number of overseas tourist arrivals declined 12.9%
between September 2007 and September 2008. The greatest declines
are in Asian and European markets, but growth has also declined in
the UK and US markets. A comparison of figures from the major
overseas markets for September 2007 and September 2008 shows that
there were significant decreases in the number of travelers arriving
from UK (down from 35,915 to 29,976); the US (down from 23,405 to
21,590) and Germany (down from 21,796 to 17,377). (Travel Hub,
December 3, 2008 and Statistics South Africa, November 27, 2008)


----------------------------------
SAA Safety Gets Thumbs Up From FAA
----------------------------------

6. (U) The U.S. Federal Aviation Administration (FAA) has extended
its accreditation of South African Airways Technical (SAAT) through
July 2009. SAAT's accreditation with the FAA was extended after FAA
inspectors performed a follow-up audit of SAAT's facilities in
November. "The outcome of the FAA's findings and the subsequent
renewal of our accreditation with this top regulatory organization
are of incredible significance for passengers, who can rest assured
that safety at SAAT remains a priority," stated SAAT CEO Clive Else.
The FAA undertook its annual inspection of SAAT's facilities in
April 2008. Inspectors identified areas requiring corrective
action. SAAT "immediately worked towards addressing and correcting
the audit issues and completed this within three months of the
initial inspection," said Else. One of the issues raised in the
FAA's initial inspection report was concern over the loss of skills
at SAAT. Else remarked that aircraft technicians were in short
supply globally, but emphasized that SAAT has since retained more
than 260 aircraft technicians and is still recruiting. Aircraft
maintenance conducted by SAAT, the largest of its kind in Southern
Africa, is governed by several international aviation regulatory
bodies, including the FAA, the European Aviation Safety Agency and
the South African Civil Aviation Authority. (News24, December 4,
2008)

--------------------------------------------- --
Eskom Terminates Nuclear 1 Procurement Process,
QEskom Terminates Nuclear 1 Procurement Process,
but South Africa Still Committed to Nuclear
--------------------------------------------- --

7. (U) State power utility Eskom has terminated the procurement
process for the proposed Nuclear 1 project after its board decided
it could not make an investment decision to proceed due to financial
pressures. Department of Public Enterprises Director General Portia
Molefe stressed that the country remained committed to its nuclear
power program despite the decision. She commented that South Africa
must "deal with" its carbon footprint and diversify its energy mix.
Molefe asserted that there was sufficient capacity coming on line to
close the power supply gap, especially in an environment of slowing
demand. She was also convinced that the market dynamic would change
so that when the government and Eskom were ready to reengage with
the nuclear vendors, it would be more of a "buyers market." The
proposed Nuclear 1 project would have resulted in the construction
of the country's second pressurized water reactor nuclear power
plant, after the station at Koeberg near Cape Town. Westinghouse
and Areva of France were the designated bidders for the project.

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Eskom is grappling with a huge financing challenge. Ratings agency
Standard & Poors recently said South Africa's National Treasury
needed to extend "unconditional, timely guarantees" across all of
Eskom's debt stock if it hoped to sustain the utility's current BBB+
investment-grade credit rating. The Treasury has not yet announced
its position on the matter. (Engineering News, the Weekender,
Business Report, Business Day, December 6, 2008)

--------------------------------------
PetroSA Appoints KBR as Engineering
Contractor for Proposed Coega Refinery
--------------------------------------

8. (U) State-owned petroleum company PetroSA has appointed US firm
KBR as the engineering contractor for Project Mthombo, the proposed
$11 billion, 400,000 barrel-per-day (bpd) Coega crude oil refinery.
PetroSA CEO Sipho Mkhiza stated that KBR had been contracted to
provide feasibility and front-end engineering and design study
services. The contract is estimated to be worth about $100 million.
KBR expressed its commitment to Black Economic Empowerment
principles. KBR expects to complete the feasibility study by
September 2009, and plans to start construction in 2011. Mkhize
stated that the rationale for building the refinery was that
national demand for refined fuels already exceeded South Africa's
refining capacity. Critics question the government's decision to
prioritize this investment, noting that it may be based on now
out-of-date growth and demand projections. (Engineering News,
Business Day, December 10, 2008)

---------------------------------------------
SADC Launches New Science and Technology Desk
---------------------------------------------
9. (U) South African Development Community (SADC) Science and
Technology Chairman Mosibudi Mangena announced the creation of a
unit that will coordinate the SADC region's science and technology
activities. The unit would apply science, technology, and
innovation to poverty eradication efforts and ensure that the SADC
region contributes to and benefits from the global pool of
scientific knowledge and technological advances. The South Africa
Department of Science and Technology Chief Director for Multilateral
Cooperation and Africa Lindiwe Lusenga explained that the unit would
be based at the SADC secretariat in Botswana. South Africa has
already commissioned an official to serve at the unit for a period
of three years. Lusenga commented that "The vision of the SADC
Ministers was to see the desk grow into a fully-fledged unit of
science and technology, recognizing the challenges faced by the
region on capacity building, and coordinating efforts to share
infrastructural resources and experiences for research and
development." Mangena added that the unit would coordinate the
region's science and technology activities and also promote its
agenda. He also encouraged the member states to help increase the
capacity of the unit. [Note: Mangena is also the South African
Minister of Science and Technology.] (Engineering News, November
5-11, 2008)

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