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Cablegate: South Africa Economic Newsletter July 13 2006

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RUCPDC/DEPT OF COMMERCE WASHDC
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SIPDIS

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DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND
TREASURY FOR OAISA/RALYEA/CUSHMAN
USTR FOR COLEMAN

E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWSLETTER JULY 13 2006
ISSUE

1. (U) Summary. Once every two weeks, Embassy
Pretoria publishes an economic newsletter based on
South African press reports. Comments and analysis
do not necessarily reflect the opinion of the U.S. Government.
Topics of this week's newsletter are:

- Government to simplify BEE codes;
- Second telephone operator to start operations
before end of 2006;
- Business, consumer confidence falls in June;
- Land Claims Commission pledges to settle all
claims by 2008;
- Manufacturing boosted by weak rand;
- South Africa increases imports to avoid oil shocks;
- House-price growth slows further;
- Draft industrial policy targets poor provinces;
- South African Airways profits fall 90%;
- Labor Minister recognizes skills shortage,
reaffirms labor laws for poverty relief;
- Sasol explores Indian coal conversion plant
- Turkey considers major purchase of SA helicopter;
and;
- Ecological concerns nix methane gas project.
End Summary.

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Government to simplify BEE codes
--------------------------------

2. (U) Responding to criticism from business leaders, Minister of
the Department of Trade and Industry (DTI) Mandisi Mpahlwa stated on
July 11 that his department
would seek to simplify its final Black Economic
Empowerment (BEE) best-practice guidelines before
their planned final presentation to Cabinet in August.
In particular, Mpahlwa declared that DTI will reduce
the number and complexity of constituent BEE
indicators, drop many restrictive measures for small-
to medium-sized businesses, not require foreign firms
to sell equity if they meet other benchmarks, and
craft regulations to avoid exacerbating the economy's
skill shortage. BEE codes, published by the DTI, set requirements
for companies to augment the economic
power of previously disadvantaged groups. Codes
include assessments of equity, employment, training,
and authority for members of targeted groups.
Sources: DTI press release, July 11; Business Day,
Reuters, July 12.

Second telephone operator to start operations before
end of year
--------------------------------------------- --------

3. (U) South Africa's SNO (Second National Operator)
Telecommunications Ltd., whose shareholder's include
Tata and state-owned logistics corporation Transnet,
will challenge the fixed-line monopoly of former
parastatal Telkom before the end of 2006, according
to a recent press release. Increased competition in
the sector could lower South African communications
prices, which are among the world's highest. Source: Reuters,
Finance 24, MarketWatch, June 5.

Business, consumer confidence fall in June
------------------------------------------

4. (U) The South African Chamber of Business (Sacob) Business
Confidence Index declined from 101.4 in May
to 99.4 in June, according to figures released on July
4. Sacob attributed the drop to South Africa's
growing current account deficit, inflationary
pressures, oil prices, and global investors' move away
from emerging market assets in response to rising US interest rates.
Sacob also warned, in the wake of a
spate of high-profile attacks on police, that South Africa's high
rate of violent crime damaged its appeal
to investors. Consumer confidence remained near
record high levels on the FNB/BER index released
June 5, but it too declined from 21 in the first
quarter of 2006 to 20 in the second quarter. The
reports' authors did not consider the decline serious. Source: Mail
& Guardian, July 4; Business Day, SABC, iAfrica, July 5.

Land Claims Commission pledges to settle all claims by
2008

PRETORIA 00002860 002 OF 004


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

5. (U) South Africa's Land Claims Commission (LCC), a
body formed in 1995 to adjudicate the claims of those displaced by
apartheid, declared on July 5 that it had resolved 89% of the claims
brought before it and would close all remaining cases by 2008. The
LCC has
resolved 71,645 claims, most leading to financial compensation for
the loss of urban properties. Most outstanding cases involve
poorly-documented claims or
are rural properties, which are more complicated cases
due to the government's concern for maintaining agricultural output.
Source: Business Day, SABC,
July 5.

Manufacturing boosted by weak rand
----------------------------------

6. (U) The Purchasing Managers Index (PMI) released by Stellenbosch
University's Bureau for Economic Research (BER) showed that the
manufacturing sector continued
to expand in June. The PMI stood at 59.8 for June, an increase from
May's 57.6, showing healthy growth in manufacturing, the
second-largest sector of the South African economy. The PMI measures
new orders,
inventory, production, deliveries, and employment
through a nationwide survey of purchasing managers.
An index number of over 50 implies expansion; less
than 50 shows contraction. Manufacturing growth
quickened to 5.1% year-on-year in May from .1% in
April according to a July 12 Statistics SA report. Seasonally
adjusted, the output rose by 2%. Many
analysts, however, expect this growth to recede
through the rest of the year, as the SA Reserve Bank
raised interest rates by 50 basis points on June 8
and is likely to impose 1-2 similar increases during
2006. Source: Business Day, July 4, 13.

South Africa increases imports to avoid fuel shocks
--------------------------------------------- ------

7. (U) Several major South African refineries will be
taken offline over the next several months for routine maintenance,
leading to a sharp increase in petroleum imports to avoid a
shortage. Natural gas customers in Gauteng are already experiencing
shortages, due to transportation bottlenecks between refineries and
the inland population centers. The Sapref refinery in
Durban, the county's largest refinery with a capacity
of 180,000 barrels per day, is already offline for two months, with
refineries operated by Sasol, Caltex, and Petrol SA to perform
similar shutdowns in 2006. Oil imports are already a major part of
South Africa's
growing current account deficit. Source: Business Day, July 4.

House-price growth slows further
--------------------------------

8. (U) House prices continue to rise in South Africa,
but the market growth should slow into 2007 according
to the June Absa House Price Index. Nominal house-
price growth is at a 4.5 year low after it cooled in
June to an average 13.6% year-on-year from an average
14.3% in May. A report released by Standard Bank on
July 12 further predicts that house-price growth will
slow to zero by the end of 2006, though picking up
again mid-2007. The South African Reserve Bank (SARB) raised
interest rates by 50 basis points on June 8,
the primary factor behind slower growth in the sector. Consumer
debt and rising inflation are also
significant contributors. Source: Business Day,
June 6, 13.

Draft industrial policy targets poor provinces
--------------------------------------------- -

9. (U) Minister Mpahlwa of the Department of Trade and Industry
(DTI) released a draft of his department's
new Regional Industrial Development Strategy (RIDS)
on July 10. The document outlines a national
industrial development strategy for South Africa.
RIDS includes a greater focus on integrating national development
with local and regional growth strategies
based on pre-existing industries and advantages
instead of attempting to build sectors from scratch.

PRETORIA 00002860 003 OF 004


DTI hopes to bring development to citizens outside of Johannesburg,
Cape Town, and Durban, the three major metropolitan areas that
account for more than 65% of
GDP. Mpahlwa cited an opportunity for the industrialization of
former mining towns, which have
a high concentration of unemployed people and well-developed
industrial transportation infrastructQe. Source: BuaNews,
Engineering News, July 11.

South African Airways profits fall 90%
--------------------------------------

10. (U) South African Airways (SAA), the country's
state-owned flag carrier and the employer of 11,000, reported on
July 6 that its net profits fell to R65
million ($9.2 million) in the year ending March 2006
from R648 million ($91.4 million) the year before. Although many of
its troubles sprang from a week-long strike, higher oil prices, and
a one-time R100 million
($14 million) penalty for anticompetitive practices,
SAA also fared poorly in competition with low-cost airlines. It
lost 20% of its domestic market share to
low-cost carriers last year. In response, the company announced
several dramatic changes to its business
plan. In the next 18 months, SAA hopes to cut R1.6
billion ($226 million) from its budget, obtain
government loans for a R3-4 billion ($430-$570
million) recapitalization project, and plans to launch
its own no-frills brand. Sources: Business Day,
Sunday Times, July 7; AirWise News, July 10.

Labor Minister recognizes skills shortages, reaffirms
labor laws for poverty relief
--------------------------------------------- --------

11. (U) Labor Minister Membathizi Mdladlana declared
at a July 6 conference that government must focus on building the
skills of workers as well as growing the economy, preparing citizens
to take up jobs that will
lift them out of poverty. Recently, the government
granted energy giant Sasol permission to import
thousands of skilled workers unavailable in South
Africa, an incident Mdladlana used to illustrate that
the country's 27% (official) unemployment coexists
with a shortage of qualified workers in many key
sectors. He further dismissed claims by some
businesses that relatively rigid South African labor
laws limit employment, saying that the government will maintain its
commitment to a living wage and fair
labor practices. Sources: Finance24, Mail & Guardian,
July 7.

Sasol explores Indian coal conversion plant
-------------------------------------------

12. (U) The Indian government is working with South
African energy giant Sasol to examine the feasibility
of a $6 billion coal-to-liquid (CTL) fuel plant in
that country. The facility would produce roughly
80,000 barrels per day (bpd) from India's abundant
coal reserves. Although India contains 7% of the
world's coal reserves, it must import 70% of its
petroleum. Even if Sasol and India ultimately proceed
with the plant, it will not be operational for about
10 years. Sasol is a world leader in synthetic fuels, providing 40%
of South Africa's liquid fuels with its
CTL and proprietary gas-to liquid technology. The
company recently opened a major new plant in Qatar
and plans to expand into Nigeria and China. Sources: Business
Standard, India, July 9; Business Day,
July 11.

Turkey considers major purchase of SA helicopter
--------------------------------------------- ---

13. (U) Turkey named Denel Aviation's CSH-2 Rooivalk
armed reconnaissance helicopter as one of twoQraft
under consideration for a major contract to equip its
armed forces. The deal, worth about $2 billion, could
lead to the production of up to 91 helicopters and
would be a major breakthrough for the South African aviation
industry. Apart from a 12-helicopter
purchase from the South African Air Force, the
Rooivalk has not sold any craft since its mid-1990s introduction.

PRETORIA 00002860 004 OF 004


Last year, Denel lost R1.6 billion
($226 million) and has asked the government for a
R5.1 billion ($719 million) recapitalization package.
The other competitor for the Turkish contract is
Italy's Mangusta A129 International. Source: Business
Day, July 3; IOL, Herald Eastern Cape, July 4.

Ecological concerns nix methane gas project
-------------------------------------------

14. (U) Badimo Gas withdrew its application to
nationalQil company PetroSA for the exploitation
of the Tuli coal bed methane project. Coal bed exploitation
threatened Mapungubwe National Park,
a world heritage site and a significant draw for
tourists. The proposal had drawn denunciation from
local stakeholders and environmentalists. Badimo
declared that it had been unaware of the potential
effects on the park and withdrew its application on ecological
grounds. Source: Financial Mail, June 23,
July 14.


TEITELBAUM

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