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Cablegate: South Africa Economic News Weekly Newsletter June 20, 2008

DE RUEHSA #1522/01 1960625
R 140625Z JUL 08




E.O. 12958: N/A

PRETORIA 00001522 001.2 OF 005

1. (U) Summary. This is Volume 8, issue 28 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Reserve Bank Steps Up Growth in Currency Reserves
- Big Dip in Business Confidence
- House Prices Rocked by Largest Decline in Fifteen Years
- Black Business and Professional Organizations Reject
Ruling on Chinese
- New Vehicle Sales Slump 21.9%
- Airlines Hesitant to Fly Directly to Durban's New
International Airport
- Nationwide May Come Out of Liquidation
- SAG-led AWCC Project Faces Further Delays
- ICASA Rethinks its BEE Stance
- Share Swap and Cash May See Ambani-led Group Buy a 51%
Stake in MTN
- DTI Launches Rural Tourism Promotion Scheme
End Summary.

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Reserve Bank Steps Up Growth in Currency Reserves
--------------------------------------------- ----

2. (U) SA's gold and foreign currency reserves increased by 1.3% to
$34.9 billion at the end of June 2008. The foreign reserves
build-up was supported by both the higher gold price and the SA
Reserve Bank's (SARB) increased pace of foreign currency purchases.
The SARB is under pressure to build reserves to cover the growing
current account deficit and rising import requirements as the SAG
steps up infrastructure spending. The current account deficit
reached 9% of gross domestic product in the first quarter of 2008,
the highest in 26 years, as record oil prices and infrastructure
spending fueled imports. (Business Report, July 8, 2008)

Big Dip in Business Confidence

3. (U) The SA Chamber of Commerce and Industry (SACCI) reported that
its Business Confidence Index slipped to 92.6 index-points in June
2008, its lowest level since October 2003. Business confidence is
down 7.4% from 2000, when the index was set to 100. The index hit a
peak of 103.5 index-points in December 2006, and has moved downwards
since. SACCI asserts that its index does not have the "wild mood
swings of the opinion poll-based business confidence index done by
the Stellenbosch University's Bureau of Economic Research (BER)"
since SACCI calculates its index from data rather than opinion
polls. The BER's Business Confidence Index plunged 19 index-points
during the power crisis of the first quarter and then a further 3
index-points in the second quarter, taking it to 45 index-points.
Less than 50 index-points indicate a contracting economy. The BER's
Consumer Confidence Index decreased by 18 index-points in the second
quarter of 2008 to -6 index-points , the biggest drop in 24-years
and its first negative level since the first quarter of 2004. The
BER's Purchasing Managers' Index, which is seen as a reliable gauge
for the manufacturing sector, dropped from 49.1 index-points in May
to 43.8 index-points in June. (Business Times, July 6, 2008)

--------------------------------------------- ----------
House Prices Rocked by Largest Decline in Fifteen Years
--------------------------------------------- ----------
4. (U) The latest ABSA House Price Index revealed that real house
prices in the middle segment of the market dropped 6.3% y/y in May,
Qprices in the middle segment of the market dropped 6.3% y/y in May,
the biggest plunge in 15 years. Activity levels in the residential
property market, as well as nominal and real house price growth, are
expected to taper off further from current levels towards the end of
2008 and into 2009. Nominal house price growth is forecast to slow
to around 5% in 2008 and slowing further to 4% in 2009. Short-term
indicators, such as new vehicle purchases and retail sales, continue
to suggest a slowdown in household spending. This slowdown plus the
negative wealth effects associated with slower house price growth, a
tighter credit environment, falling consumer confidence levels and
uncertainty around employment prospects are expected to continue to
weigh on economic activity. However, considering the upside risks
to inflation emanating from rising food, fuel and electricity
prices, second-round inflationary pressures and rising inflation
expectations, it is unlikely that the slowdown in growth will sway
the inflation-targeting SA Reserve Bank from its tight monetary

PRETORIA 00001522 002.2 OF 005

policy. Most economists believe there is a high probability of
another interest rate hike in August, and some believe there will
one or more hikes after that. With no quick end in sight to
rocketing inflation and interest rates that have knocked the
economy, struggling homeowners can expect things to get worse before
they get better. (ABSA Newsletter, July 8, 2008)

Black Business and Professional Organizations
Reject Ruling on Chinese

5. (U) Black business and professional organizations rejected the
Pretoria High Court's ruling defining Chinese South Africans as
colored, or "black," for the purpose qualifying as beneficiaries
under the Broad Based Black Economic Empowerment Act. "This
judgment, in our view revises a long-held historical view of the
democratic struggle in SA," National African Federated Chambers of
Commerce President Buhler Nthethwa said. "It is our considered view
that the responsibility of clarifying legislative and policy
ambiguities rest with the legislative or executive arms of
government." (Business Day, July 2, 2008)

New Vehicle Sales Slump 21.9%
6. (U) The National Association of Automobile Manufactures of SA
(NAAMSA) reported that new vehicle sales declined by 21.9% y/y in
June 2008. This is 10,956 units less than the 50,020 units sold in
June 2007. NAAMSA said the new vehicle sales environment continued
to reflect extreme weakness as the current tight monetary conditions
continued to weigh on consumer spending. Passenger vehicle sales
declined by 7,964 units or 25.8% y/y to 22,861 units in June 2008,
while light commercial vehicle sales declined by 3,021 units or
18.2% y/y to 12,975 units during the same period. However, sales of
heavy vehicles and trucks increased by 192 units or 9.8% y/y in June
2008. Vehicle exports continued to perform well and export sales
were supporting the operations of vehicle and component producers,
NAAMSA said. Export sales reflected a 52.7% y/y improvement for the
first half of 2008. NAAMSA expects new vehicle sales in the
domestic market to remain under severe pressure as a result of the
cumulative effect of inflationary pressures, interest rate
increases, the National Credit Act, high levels of personal debt,
and a slowdown in economic activity. The relatively competitive
exchange rate and existing vehicle export contracts should continue
to lend support to vehicle and component export activities over the
medium-term. (Business Day, July 2, 2008)

Airlines Hesitant to Fly Directly to
Durban's New International Airport

7. (U) Rising fuel prices have led Emirates airline to postpone the
launch of its direct service from Dubai to Durban, originally
scheduled to launch in December. South African Airways (SAA) and
British Airways (BA) have also both confirmed they have no plans to
operate to the new Durban International Airport at La Mercy. These
airlines do not plan to take advantage of the SA Department of
Transport's recent approval of direct frequencies between the UK and
QTransport's recent approval of direct frequencies between the UK and
Durban in 2010. BA told TravelHub that it had "no plans to operate
flights to Durban". SAA confirmed that its network strategy was
aligned to its restructuring program, which aims to build up
Johannesburg as the strongest hub in Africa. SA Board of Airline
Representatives CEO Allan Moore explained that the majority of major
airlines are members of alliances and rely on the network of feeder
flights operated by the home carrier of the alliance. According to
Moore, it "is more common to find airlines serving an entry port
rather than a number of destinations within a country." Moore noted
that the new airport "will have to compete on its own merits to
attract the attention of airlines, and airlines will have to see the
destination as viable before they consider adding it to their
network." Airlines have objected to the construction of La Mercy,
saying they had only been consulted on whether or not they would fly
there and if so, what their requirements were, after the Airlines
Company of SA (ACSA) had already embarked on the project. Lufthansa
Swiss Director for Southern & Eastern Africa Gabriel Leupold
recently objected to cross subsidization, where Johannesburg-based
airlines were funding the construction of La Mercy airport. Gabriel

PRETORIA 00001522 003.2 OF 005

said, "International airlines will review their markets and decide
whether or not to deploy aircraft on a route based on how much
business sense it makes to launch a route. Not because more traffic
rights have been granted." (Travel Hub Report, July 8, 2008)

Nationwide May Come Out of Liquidation

8. (U) The SA press is reporting that Nationwide Airlines could soon
come out of liquidation and be taken over by a new airline that will
begin operating from Durban International Airport in three months.
Nationwide was provisionally liquidated at the end of April and a
proposal to buy the airline is currently on the table. Whether the
new airline would operate under the Nationwide name or start with a
new identity is still being discussed. This move would come on the
back of a recent announcement by Emirates to abandon plans for
direct flights between Dubai and Durban due to high fuel costs.
Nationwide attorney Haroon Laher said he was in the process of
drafting legal documents following a successful meeting with the
potential buyer this week. A meeting between the company's
attorneys and the liquidators will take place next week before the
process goes further. If the liquidators approve the transaction,
the company will come out of liquidation and a compromise will be
sought regarding liabilities to all creditors. "All employees will
be considered for re-employment (by the new company)," Laher said.
Laher would not give details regarding the identity of the potential
buyer or the type of airline the buyer would operate, but media
reports said it would operate as a low-cost rival to Kulula, 1Time,
and Mango. Laher also confirmed that there were strong indications
that the company would use Durban as its headquarters. Some key
employees in Durban have already been contacted to establish their
availability should the new airline take off. Rumors that the
interested party was associated with Dubai could not be confirmed.
(All Africa News, July 5, 2008)

SAG-led AWCC Project Faces Further Delays

9. (U) A delay in finalizing the commercial and legal agreements for
the consortium that plans to participate in the $510 million African
West Coast Cable (AWCC) means that financial closure is now unlikely
to be achieved by mid-July as first planned. The AWCC is a SAG-led
initiative, which involves the deployment of a
3,840-gigabits-per-second, undersea, fiber-optic cable.
State-owned, ICT infrastructure company Broadband Infraco will own
26% of the cable and a range of private-sector participants will own
the remaining 74%. The AWCC project will incorporate branching
units in at least ten countries along the West Coast of Africa and
terminate in London. The AWCC system will follow roughly the same
route as the Telkom-controlled South Atlantic-3 (Sat-3) cable, while
also competing with the cable that is being built along Africa's
East Coast by the U.S.-led SEACOM consortium. However, the SEACOM
contracts are finalized and construction is expected to be completed
Qcontracts are finalized and construction is expected to be completed
by June 14, 2009, well in advance of the start of the 2010 FIFA
World Cup. Broadband Infraco is leading the AWCC initiative and has
admitted that the initial schedule could not be met. Broadband
Infraco Director Cornelis Groesbeek explained that the conclusion of
the consortium agreement was one of two key requirements for
achieving financial closure. Groesbeek assured the press that
weekly review meetings are now being held to finalize the agreement.
There are reportedly 14 signatories to the process, but Groesbeek
said a decision has also been made to release the names of the
participants only after the financial deal is finalized. He said
Broadband Infraco is currently finalizing the contract terms and
conditions for the manufacture and deployment of the cable with a
preferred supplier, but he said the name of the supplier will only
be made public "once the contract has been signed". He reported
that it will take "roughly 27 months" from financial closure to
commissioning. This implies a "ready for service date" in the
latter half of 2010, after the completion of the FIFA World Cup.
"The 2010 traffic will be carried on the upgraded SAT-3 system,"
Groesbeek asserted. However, he revealed that "2010 contingency
plans" have been designed into the AWCC project schedule. "In the
event that either Infraco or any one of the private-sector
participants needs to carry 2010 World Cup traffic on the AWCC, we
will land the cable in Portugal from the Northern Branching unit
ahead of the World Cup and then complete the last section of the

PRETORIA 00001522 004.2 OF 005

system up to the UK after the event," he concluded. (Engineering
News, July 9-11, 2008)

ICASA Rethinks its BEE Stance

10. (U) Widespread criticism of "unworkable" Black Economic
Empowerment (BEE) demands for new high-speed WiMax internet access
license bidders have forced the Independent Communications Authority
of SA (ICASA) to reconsider its stance. Six new wireless licenses
had been earmarked for companies with at least 51% black-ownership.
This provoked an outcry that companies that could meet the BEE
requirement would lack the cash, skills, and the technical know-how
to operate a national network. One of the few companies that
believes it has the cash and the skills to succeed is 65%
black-owned UniNet, chaired by former Telkom CEO Papi Molotsane.
UniNet has sufficient resources from financiers to plan a R1.6
billion ($208 million) expansion. The outcry has prompted ICASA to
backtrack and ask the industry to comment on its licensing
requirements. An ICASA spokesman would not confirm whether the
comments would influence a reworking of the BEE requirements.
According to critics, the rules not only prejudice traditional
white-owned bidders, but also make it unnecessarily tough on
potential black bidders. Internet Solutions Chief Regulatory
Officer Siyabonga Madyibi said 51% black ownership was a blatant
contradiction to ICASA's existing policy of issuing licenses to
companies that are 30% black, and he would lobby for that to be
relaxed. The high black equity demand would deter foreign investors
and deprive license winners of foreign expertise, said industry
analysts. The new rules stop license winners from merging with
larger players for at least five years, so they could not use the
license to strike a deal to strengthen their business. That would
force them to fund the network themselves, and financiers are
unlikely to back a new entrant in a sector dominated by Telkom,
MWeb, Internet Solutions and the cellular operators. As companies
that qualified for a WiMax license were likely to be relatively new,
investors would be loath to take a minority stake that gave them no
control over the business. ICASA Spectrum Manager Mandla Mchunu has
already admitted that it will be difficult for firms that meet the
criteria to succeed in building a national internet operation.
ICASA will face a deluge of written complaints, since major
technology companies are keen to win the WiMax licenses. Companies
are also concerned that the licenses only grant 20 megahertz of
spectrum, giving them too little bandwidth to operate effectively.
UniNet representatives contend that license operators need at least
30 megahertz to offer a wide range of voice, data and video
services. (Business Day, July 9, 2008)

Share Swap and Cash May See Ambani-led
Group Buy a 51% Stake in MTN

11. (U) SA mobile operator MTN has agreed to extend its merger talks
with India's Reliance Communications. Bloomberg reported that a
group headed by Anil Ambani plans to buy 51% of the MTN Group by
offering cash and a share swap. Under this deal, MTN shareholders
Qoffering cash and a share swap. Under this deal, MTN shareholders
are expected to receive cash and shares in Reliance Communications,
with the aim of making Reliance an MTN-controlled company. However,
the Ambani-led group will hold control over both companies by virtue
of becoming a 51% shareholder in MTN. The deal is reportedly
structured to ensure that the Ambani group retains shareholding in
Reliance telecoms and steers around the right of first refusal
controversy that erupted earlier. The initial deadline, which gave
Ambani's Reliance 45 days for exclusive negotiations, was extended
as MTN needed more time to study the deal. Successful negotiations
would lead to the creation of one of the world's top ten cellular
companies. Should this deal go ahead, and depending on the
structure of the share swap and cash components, there could be an
inflow of foreign direct investment to SA. This could go some way
in plugging the financing requirement for SA's ballooning current
account deficit and reduce some of the downside risks associated
with the currency. (ABSA Newsletter, July 8, 2008)

DTI Launches Rural Tourism Promotion Scheme

PRETORIA 00001522 005.2 OF 005

12. (U) The Department of Trade and Industry (DTI) launched the
Tourism Support Program (TSP) to boost tourism outside of the
existing urban clusters of Cape Town, Durban, and Johannesburg.
Minister of Trade and Industry Mandisi Mpahlwa believes the new
scheme will encourage growth in the tourism sector across the
country instead of just certain areas. Mpahlwa said, "TSP seeks to
specifically promote sustainable job creation outside the
traditional tourism destination clusters and to encourage greater
transformation in the sector by placing a strong emphasis on
broadening participation in the sector." The TSP will replace the
DTI's Small and Medium Enterprises Development Program (SMEDP),
which was shut down in 2006 because "deserving" tourism businesses
were not benefiting from the grant system. "Our decision to suspend
the SMEDP was done for a good reason, but was misunderstood and
criticized by the media," said DTI Director General Tshediso Matona.
He said, "It had some major weaknesses and suspending the program
was the only way we could fix things." Matona noted that the new
program is far more promising in terms of supporting deserving
enterprises. Businesses looking for incentive grants will be
expected to meet certain criteria in order to qualify. This will
include being situated outside of the traditional tourism clusters
defined by the program, achieving a level-four Broad Based Black
Economic Empowerment status, and promoting the creation of
sustainable jobs. (Travel Hub Report, July 7, 2008)


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