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

DE RUEHSA #1584/01 2030606
R 210606Z JUL 08




E.O. 12958: N/A

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1. (U) Summary. This is Volume 8, issue 29 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- OECD Thinks SAG Is too Dominant in Economy
- ANC Will Keep Inflation Targeting
- Crime Crippling Small Business
- SADC to Launch Free Trade Area
- Mercosur Trade Agreement Concluded
- U.S. Signs Trade and Investment Agreement with SACU
- SAA Optimistic Despite Posting Loses
- Kulula Irked by SAA Begging Bowl
- Quantas Bumps up SA Route
- Transnet Asserts that Eskom's Rating Should not Affect
It's Expansion Plans
- Eskom Taps Former Gold-Miner Bobby Godsell as New
- Policy Release May Clear Way for Eskom Nuclear
Power Plants
- SA's Engen Snaps up Shell's Business in Zimbabwe
End Summary.

OECD Thinks SAG Is too Dominant in Economy

2. (U) The Organization for Economic Co-operation and Development
(OECD) said South Africa must do more to improve competition in its
economy, and gives the state too big a role in tackling the
constraints to growth. In its first report on South Africa, the
30-member group criticized the South African government's latest
strategy for development, the Accelerated and Shared Growth
Initiative for SA (ASGISA), saying that some of its policy responses
were weak or inappropriate. Plans to give incentives to some
industries to create more jobs would limit competition, while
government programs and initiatives were "at odds with the
recognition of failures of official planning, co-ordination and
capacity" to achieve faster growth, the OECD-group said. The
dominance of large private sector companies was also seen as
negative, as this could be linked to lower output and employment,
and higher prices. The OECD report praised South Africa for
policies that have boosted economic growth, lowered inflation, and
produced the country's first budget surpluses in history. At the
same time, the report also highlighted what it saw as weaknesses
stemming from high unemployment, poverty, the spread of HIV/AIDS,
and crime. "The most disappointing aspect of post-apartheid
economic performance is the emergence and persistence of extreme
levels of unemployment," it said. The report is a result of the
OECD's drive to boost co-operation with emerging market economies
that may want to join the organization in the future. Many of the
OECD's conclusions appear to clash with plans by the African
National Congress (ANC) to bolster the role of the state as it works
to ease chronic poverty and income inequality. ANC President Jacob
Zuma has said, for example, that the party wants to put the state
right at the center of development, with a "critical role" for state
enterprises. (Business Day, July 16, 2008)

ANC Will Keep Inflation Targeting

3. (U) African National Congress (ANC) Secretary-General Gwede
Mantashe moved to calm investors' fears that a new ANC government
would unleash an inflationary spiral by profligate state spending in
favor of the poor. Government spending would be focused on
Qfavor of the poor. Government spending would be focused on
investment rather than inflationary consumption spending, and the
question of a budget surplus or deficit would have to be linked to
the state of the current account of the balance of payments,
Mantashe said. Budget surpluses were not a curse as such, he said,
but were unacceptable if they arose from the state's inability to
spend. He dismissed fears that the post-Polokwane ANC leadership
was a group of "leftist, low-caliber individuals" who posed a risk
to the solid foundations built up over the past 14 years. Mantashe
strongly supported the continuation of the policy of inflation
targeting, but urged that the target band be debated. He believed
monetary policy should not focus only on inflation but also on
social issues such as unemployment. He said it would be
"disastrous" if land redistribution jeopardized agricultural
production, saying the policy should not be pursued simply to

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achieve the 30% land transfer target by 2014. The rural poor should
be helped to become more self-sufficient in food production and less
dependent on social grants because "the grant regime is not
sustainable in the long term." At the same time, Mantashe stressed
the need for a greater focus on job creation and social services to
prevent the alienation of the poor. Mantashe said the 2009-10
medium-term budgetary framework would focus on accelerating the pace
of economic growth and investment in productive capacity, job
creation, development of a social security net, and improving the
capacity and effectiveness of the state, especially in fighting
crime. (Business Day, July 17, 2008)

Crime Crippling Small Business

4. (U) A study commissioned by the South African Presidency found
that a quarter of South Africa's small businesses were reluctant to
expand or employ more people after having been exposed to crime.
The smallest, most vulnerable companies and the most successful
entrepreneurs were the hardest hit. It was estimated that smaller
businesses could expect to lose at least 20% of annual turnover to
crime through direct and indirect costs, which could mean the
difference between the survival and failure of a small company.
Half of the companies interviewed had no insurance. The findings
have serious implications for the government's economic growth and
job creation plans, which hinge largely on the development of a
small business sector that the government believes has the potential
to lift millions out of poverty and into the mainstream economy.
The survey found that businesses directly affected by crime were 20%
less likely to increase their staff numbers, and were 10% were more
likely to shed jobs, with those in informal settlements or townships
the most vulnerable. The survey recommended that more effective
policing be provided, with greater co-operation among business and
the police, particularly in the townships and informal settlements.
It also recommended that the Department of Trade and Industry
develop mechanisms to assist emerging businesses, such as subsidies
for burglar- proofing. (Business Day, July 17, 2008)

SADC to Launch Free Trade Area

5. (U) The Southern African Development Community (SADC) is set to
launch a Free Trade Area (FTA) on August 17. However, integration
is not limited to creating an FTA. The strategic plan of SADC, as
set out in the Regional Indicative Strategic Plan (RISP), foresees a
customs union in 2010, a common market by 2015, a monetary union by
2016, and a single currency by 2018. SADC private sector
representatives recently met to discuss the implementation of the
SADC FTA and the ambitious plans for deeper economic integration.
Although the private sector participants strongly supported the
promotion of intra-SADC trade and investment, they agreed that it is
unrealistic to introduce a customs union until the FTA has been
fully and successfully implemented. Private sector organizations
from eleven of the fourteen member states were in attendance, but
Qfrom eleven of the fourteen member states were in attendance, but
the representatives held different views on how to achieve an
optimal integrated market. South African representatives were
primarily focused on exporting products to the rest of SADC as
efficiently and cheaply as possible. In contrast, representatives
from the rest of SADC were less concerned about trade facilitation
and more about supply side capacity required to create the right
environment for their manufacturing industries. (Tralac Newsletter,
July 16, 2008)

Mercosur Trade Agreement Concluded

6. (U) The Southern African Customs Union (SACU) has concluded a
preferential trade agreement with Mercosur, which includes Brazil,
Argentina, Uruguay and Paraguay. According to SA's Chief Trade
Negotiator Xavier Carim, all technical negotiations have been
concluded. The agreement will be submitted to the national
authorities to ensure legal conformity to national laws. A date
will then be determined for ministerial signature and ratification.
It is not a free trade agreement, but creates a legal framework for
trade in goods between SACU and Mercosur. The agreement covers

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2,000 products. An agreement was built into the pact that allows
the parties to expand the trade agreement should they wish to do so.
(The South African Exporter Supplement, Business Day, July 2008)

--------------------------------------------- ------
U.S. Signs Trade and Investment Agreement with SACU
--------------------------------------------- ------

7. (U) The Southern African Customs Union (SACU) has concluded a
trade, investment and development co-operation agreement (TIDCA)
with the U.S. The pact is not a free-trade agreement. However,
South Africa's Chief Trade Negotiator Xavier Carim said the deal was
important as the parties would look to co-operate on sanitary and
phytosanitary (SPS) issues and other technical areas. In terms of
the agreement, technical barriers to trade would be identified, and
the parties would attempt to facilitate trade in those areas and
pursue investment promotion activities. SACU already has
preferential access into the U.S. market under the unilaterally
extended African Growth and Opportunities Act (AGAO). (The South
African Exporter Supplement, Business Day, July 2008)

SAA Optimistic Despite Posting Loses

8. (U) South African Airways (SAA) has posted a net loss of R1.09
billion ($142 million) for the 2007/08 financial year. The loss is
attributed to once-off restructuring costs of R1.35 billion ($175
million) and a 1.3% decline in passenger volume. CEO Khaya Ngqula
asserted that this is a good result considering that SAA decreased
its capacity by 30% when it grounded six of its aircraft. Ngqula
also said the airline has done extremely well when compared to the
performance of the global airline industry. He emphasized that SAA
is currently above target in the current financial year, and
although it will be tough, he is confident a profit will be
achieved. (Travel Hub Report, July 17, 2008)

Kulula Irked by SAA Begging Bowl

9. (U) Low-cost airline Kulula lamented to the press that it is
fed-up with South African Airways (SAA's) continued requests for the
South African government to recapitalize the state-owned airline.
Kulula said that in the past few years the government had poured
more than R15 billion into SAA, which most recently requested a
further R6 billion (R2.8 billion of which it has already received in
the form of a loan). Following the release of yet another
disastrous set of results from SAA, Kulula once again called on the
SAG to keep promise made by the Minister Public Enterprises last
year that "taxpayers will stop filling the begging bowl for ailing
state-owned businesses." Kulula said there were more pressing
needs, such as education, health, safety and security. Kulula
pointed out that "South African aviation is littered with failed
airlines that could not compete with state-funded SAA - Flitestar,
SunAir and Nationwide to name just three, and state
re-nationalization of the industry will continue to be destructive
to free and fair competition." The airline also referred to the
recent OECD report, which highlighted excessive state involvement in
Qrecent OECD report, which highlighted excessive state involvement in
the economy, and its constraining effect on growth. The airline
said it was bizarre that Comair, which runs Kulula, paid hundreds of
millions of rands a year in income tax, fuel taxes, value added tax,
import duties and other levies, only to have this paid over to SAA
to compensate for its inefficiencies. (Business Day, July 18,

Quantas Bumps up SA Route

10. (U) Quantas Airways announced that its South African service is
unlikely to be affected by the airline's recently introduced
cost-cutting measures, since both its Perth and Sydney routes were
performing well. Quantas Manager for Africa Michaela Messner said
there is a strong demand for both corporate and leisure travel, with
yearly growth on both routes out of Johannesburg. Quantas plans on
increasing its service on the Sydney route by adding a sixth flight
to its weekly schedule in December. The decision to add the
additional flight was a result of strong demand for its newly

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launched Premium Economy Class product. Messner noted that the
premium product appealed to passengers who "look to travel in
comfort but are not able to afford business class." (Travel
Industry Review, July 2008)

Transnet Asserts that Eskom's Rating
Should not Affect It's Expansion Plans

11. (U) State-owned transport and freight logistics group Transnet
announced that foreign investors are sufficiently discerning to be
able to distinguish between the financial health of Transnet and
state-owned power company Eskom. Transnet asserted that its ability
to raise capital should not be undermined, even if Eskom's credit
rating were to be downgraded. CEO Maria Ramos will embark on an
international road show to engage with the credit rating agencies,
potential investors, and key export credit agencies. Ramos
acknowledged that the tightening in the capital markets did coincide
with a crucial debt-raising year for Transnet, which would be
seeking to raise nearly R37 billion ($4.8 billion) over the next
three years. She said that there was still considerable appetite
for well managed, emerging-market infrastructure companies. "There
are still investors out there looking for good infrastructure
assets. But it will take careful planning as people will be looking
at the quality of the credit more carefully, whereas a year ago it
seemed no-one looked at anything and money was being thrown at you,"
she explained. For now, the credit-ratings agencies have maintained
their respective negative outlooks on Eskom, but none had moved to
downgrade the power utility. By contrast, Ramos noted that
Transnet's rating had improved in recent years and that it had
issued its first bonds without resorting to government guarantees.
CFO Chris Wells stressed that, despite current financial-market
stress and illiquidity, the group would press ahead with its plan to
raise funds from both the domestic and international capital
markets. The largest portion of the debt would be raised
domestically. "Importantly, though, we are going to need to raise
money on foreign markets, and we have estimated that it could be
26%," Wells said. He cautioned that the percentages could change
depending on where it would be most cost effective to raise the
finance. Transnet's three-year timetable indicated that it would
have to raise R13.7 billion ($1.8 billion) in the current financial
year to help fund the R20 billion ($2.6) in capital expenditure the
company has already budgeted for. That figure should rise modestly
to R13.8 billion ($1.8 billion) in 2010, before falling to around R9
billion ($1.2 billion) in 2011.

--------------------------------------------- -------
Eskom Taps Former Gold-Miner Bobby Godsell as New
Chairman DTI Launches Rural Tourism Promotion Scheme
--------------------------------------------- -------

12. (U) Well-known business and mining personality Bobby Godsell was
appointed Eskom Chairman at the state power company's annual general
meeting on July 17. The former AngloGold Ashanti CEO will replace
the embattled Valli Moosa, who has taken criticism for the power
Qthe embattled Valli Moosa, who has taken criticism for the power
crisis in South Africa. Godsell currently serves as chairman of
Business Unity SA and was formerly president of the Chamber of
Mines. His appointment follows the recent appointment of another
prominent mining figure to catalyze change at Eskom -- former Kumba
(Iron mining company) CEO Ras Myburgh will advise Eskom on coal
procurement. A Business Day editorial welcomed the sorely-needed
injection of leadership at the power company, citing Godsell's
experience as a high caliber, tough manager who can apply needed
attention to detail. Speaking at a recent conference on the
electricity crisis, Godsell called for a "Team SA" approach to
dealing with the crisis, asserting, "This is a national crisis and
we need a national effort to respond to it. There is no point in
having the cheapest electricity in the world if you don't have any
electricity. The challenge now is whether our leadership can be
both cohesive and decisive in the way it was in 1994. We've had too
many summits about the crisis; it's time to get on with it."
(Engineering News, Business Day, Sunday Times, July 13-18, 2008)

Policy Release May Clear Way for
Eskom Nuclear Power Plants

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13. (U) Department of Minerals and Energy Chief Director of Nuclear
Energy Tseliso Maqubela said Minister Buyelwa Sonjica would shortly
launch the new nuclear energy policy which was adopted by the
cabinet last month. Maqubela said the major change between the
final policy (not yet released) and the draft released for public
comment last August (available on the SA DME web-site at was the removal of a
proposal to set up an agency devoted to nuclear security. He said
this function should be performed by the national nuclear regulator,
in line with international practice. "Nothing has really changed
except the wording in some cases to indicate that nuclear will not
be the only energy developed," Maqubela said. Flexibility has been
built into the policy approach to accommodate the development of new
technologies and changing market conditions. Maqubela said that it
was no longer the case that the South African government had
quantified a fixed target for nuclear of 25% of total power
generation by 2025-2030 (from existing 6%). "We don't want to tie
ourselves down - it could be that clean coal technology or methods
for carbon capture and storage are developed," he added. Eskom is
assessing bids from Westinghouse and Areva for construction of the
first 3,000 MW tranche of a new nuclear power plant, but the
decision on the preferred supplier has been deferred to September
from June. Meanwhile, the government has enlisted the aid of a
brand consultant, Freedthinkers, to give the image of nuclear power
in South Africa a make-over and attempt to unearth and correct
misperceptions and apprehensions on the part of the public.
Opponents fear that the move may be an attempt to short circuit
public consultation as the government presses ahead with its program
to build up to a dozen more conventional plants and potentially
twice that number of pebble-bed modular reactors. (Engineering
News, Business Day, Business Report, July 11, 14, 2008)

--------------------------------------------- ---
SA's Engen Snaps up Shell's Business in Zimbabwe
--------------------------------------------- ---

14. (U) SA petroleum products group Engen announced it had concluded
a sale and purchase agreement to buy Shell's downstream business
interests in Lesotho and crisis-torn Zimbabwe, where Engen said it
was taking a long-term view that the economy would recover. Engen
has also recently acquired Shell's downstream interests in Gabon and
the DRC. Engen's spokeswomen said the recent acquisitions were in
support of the company's increased focus on sub-Saharan Africa. In
Zimbabwe, Engen - owned by Malaysian oil company Petronas (80%) and
black economic empowerment group Worldwide Africa Investment
Holdings - would purchase Shell's share in a joint venture with BP.
Engen CEO Rashid Yusuf said, "While Zimbabwe's economy has declined
sharply over the last decade, it still has good infrastructure which
we believe will form the basis of renewed economic growth, once the
current political situation is resolved." A Shell spokesman said
the deals were consistent with the multinational's "more upstream
and profitable downstream strategy, and the company remains
Qand profitable downstream strategy, and the company remains
committed to Africa." (Business Day, July 11, 2008)


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