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Cablegate: South Africa Economic News Weekly Newsletter August 1, 2008

DE RUEHSA #1712/01 2170616
R 040616Z AUG 08




E.O. 12958: N/A

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1. (U) Summary. This is Volume 8, issue 31 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Rand Strengthens as Trade Deficit Decreases
- Inflation Races to 11.6%
- China to Extend Acquisitions in Africa
- Bad Bank Loans on Rise in South Africa
- Trade Talks Collapse Bad for South Africa
- MIDP Rewrite 'Poses Risk to Car Exporters'
- OECD Report Questions MIDP Policy
- Gautrain Might not be Ready for World Cup
- End of Load Shedding for Johannesburg - City
Power - Wishful Thinking?
- The Next, Bigger Crisis - Power Distribution
- South Africa Stopped Zimbabwe Power
Exports Months Ago
- Government Proposes New Carbon Taxes
- Climate Change Could Destroy Species in Kruger
National Park
- CITES Criticized for Authorization for Ivory Sales
to China
End Summary.

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Rand Strengthens as Trade Deficit Decreases

2. (U) The rand rose to a six-month high against the dollar after
South Africa's trade deficit narrowed unexpectedly last month. The
local currency climbed as much as 0.8% to R7.33 to the dollar, the
strongest level since February 4. The South African Revenue Service
(SARS) said the deficit fell from R1.7 billion ($233 million) in May
to R183 million ($25 million). "The more favorable trade balance,
despite remaining in deficit territory, is a welcome reprieve after
reflecting an average monthly deficit of R6.5 billion ($890 million)
in the year to date," Standard Bank Economist Shireen Darmalingam
said. SARS figures reflect a trade deficit of R34.2 billion ($4.7
billion) for the year to date. Exports rose 6.1% in June, mainly as
a result of robust growth in exports of jewelry, especially gold.
Exports of mineral and chemical products also rose strongly,
contributing R2.7 billion ($370 million) to export revenue. Growth
in exports of vehicles remained robust, rising 45.8% y/y. The rise
in these categories was partly countered by a decline in exports of
base metals, which fell by R4 billion ($548 million). Imports
stayed resilient in June, increasing from R57.9 billion ($7.9
billion) in May to R60.3 billion ($8.3 billion) - an increase of
4.2% after declining 12.5% in the previous month. Imports of
mineral products such as oil were again the main reason for the
increase in imports, with most other categories relatively unchanged
over the month. (Business Day, August 1, 2008)

Inflation Races to 11.6%

3. (U) Statistics South Africa (StatsSA) announced that CPIX
inflation (consumer inflation excluding mortgage costs) surged from
10.9% in May to 11.6% in June, exceeding consensus market forecasts
for an 11.3% increase. CPIX inflation has now breached its 3%-6%
official target range for 15 months in a row. Prices for food and
fuel were once again the main culprits. Food prices increased by a
shocking 18.2% y/y, while transport costs increased 17.4% y/y in
June. The Reserve Bank has raised the policy interest rate by five
percentage points to 12% since June 2006 in a bid to curb mounting
Qpercentage points to 12% since June 2006 in a bid to curb mounting
price pressures, primarily sparked by rising food and fuel costs.
The annual rise in CPIX is expected to climb above 13% later this
year, as the effect of steep hikes in electricity tariffs feeds into
consumer prices. That will in turn put upward pressure on inflation
expectations and pay settlements, which some economists believe
could prompt the South African Reserve Bank to raise interest rates
on August 14. (Business Day, July 31, 2008)

China to Extend Acquisitions in Africa

4. (U) High-level bankers from the Industrial and Commercial Bank of
China (ICBC) and from Standard Bank, respectively China and Africa's

PRETORIA 00001712 002.2 OF 005

biggest banks, are examining potential targets in Africa's oil and
gas, ICT, base metals and power sectors, according to executives at
Standard Bank. They said that the resulting deals would be worth at
least $5.5 billion, the size of the 20% stake in Standard purchased
last year by ICBC. Standard intends to use the connection with ICBC
to open doors to Chinese investors and guide them into Africa.
Standard has a presence in 18 sub-Saharan Africa countries. The
banking executives said that Nigeria, Democratic Republic of Congo,
and Angola are ripe for Chinese deals. (Financial Times, July 30.)

Bad Bank Loans on Rise in South Africa

5. (U) The South African Reserve Bank's (SARB) 2007 Supervision
Annual Report noted that South Africa's banking system is sound and
profitability is strong, but conceded that bad debts are rising as
borrowing costs increase. Non-performing loans in the commercial
banking sector increased from R18.8 billion ($2.6 billion) at the
end of 2006 to R29.4 billion ($4 billion) at the end of 2007, and
continued to grow into 2008. By the end of May, bad loans,
including a tighter change in definition after the implementation of
Basel 2 standards, had grown to R55.7 billion ($7.6 billion), which
accounted for 2.5% of total loans and advances. The ratio has
averaged about 1% in the past. However, SARB's Registrar of Banks
Errol Kruger said there was no cause for alarm, with the capital
adequacy ratio still high at more than 12% and banks closely
monitoring the situation. "It would not be correct to say it is not
a worry but it is not a surprise ... there are no red lights
flashing," he said, adding. "I am very happy to report that the
banks are in good shape." Local banks have no direct exposure to the
global credit crisis, but domestic conditions have deteriorated due
to tighter monetary policy and rising prices. The SARB report
showed that banks' profitability remained solid due to strong asset
growth. Total net income after taxes rose 20.6% y/y to R31.8
billion ($4.4 billion) at the end of December 2007, while the
cost-to-income ratio stood at 50.6% in May 2008. Total industry
assets increased to R2.86 trillion ($392 billion) by the end of May.
(Beeld, July 30, 2008)

Trade Talks Collapse Bad for South Africa

6. (U) Business Unity South Africa (BUSA) said it was disappointed
by the news that the latest round of negotiations at the World Trade
Organization (WTO) had failed to reach agreement. It was clear that
some progress was made on key matters related to agricultural and
industrial negotiations. "South African business regrets that it was
not possible to cement these movements and address other outstanding
issues, including some of those of specific concern for South
Africa," BUSA said. The status quo now remained for the foreseeable
future. "This means that South African exports will continue to face
competition from subsidized products from other countries," noted
BUSA CEO Jerry Vilakazi. With the collapse of the WTO talks, the
QBUSA CEO Jerry Vilakazi. With the collapse of the WTO talks, the
possibility of redressing the imbalance in the global trading system
in favor of developing countries was also put on ice. BUSA said it
remained committed to working with the government and other
stakeholders in continuing to actively participate in WTO
negotiations. (Beeld, August 31, 2008)

MIDP Rewrite 'Poses Risk to Car Exporters'

7. (U) South Africa's vehicle sector is deeply concerned about the
revised architecture of the Motor Industry Development Program
(MIDP), with insiders warning that major exporters and
capital-intensive producers in particular stand to lose. South
Africa was forced to review the program as it does not comply with
World Trade Organization (WTO) rules. Material changes, notably a
shift from an export-based incentive to a production allowance, may
not be attractive enough to keep export-oriented manufacturers based
in South Africa. BMW and DaimlerChrysler would be hit hard, as they
export 80% and 60%, respectively, of their total production. After
a consultative session with the team reviewing the MIDP, it is
understood that virtually all segments of industry are unhappy with

PRETORIA 00001712 003.2 OF 005

the new structure and its implications for profitability. The
sector is already under pressure with a decline in demand for cars.
One insider said the latest draft was "WTO compatible, but does not
support industry". The new scheme is expected to be released at the
end of August 2008. (Business Day, July 28, 2008)

OECD Report Questions MIDP Policy

8. (U) The 30-member Organization for Economic Co-operation and
Development (OECD) criticized South Africa's Motor Industry
Development Program (MIDP) in its first report on the country. The
OECD said, "Such a support program is often justified by the 'infant
industry' argument. The extent to which such an argument may apply
to a sector essentially driven by foreign direct investment is,
however, questionable, as is the quasi-permanent character of the
subsidies." The OECD report contended that there is a risk of waste
and misallocation of resources, as these policies often further
distort competition between industries or firms. OECD Secretary
General Angel Gurra suggested that a more detailed cost-benefit
study be undertaken to establish the validity of the MIDP. However,
Department of Trade and Industry (DTI) Director-General Tshediso
Matona recently defended the economics behind sustained
automotive-industry support. Matona said the new program would
shift the emphasis away from the current export focus, to one that
emphasized 'scale' in the production of vehicles, and was supportive
of the development of world-class component manufacturing. "Through
the MIDP, we know now that we have the capacity to produce
high-quality cars for export. We now need to develop the economies
of scale so as to reduce production costs and to deepen the
components industry. Those are the two main pillars of the new
support instrument," Matona said. (Engineering News, July 25, 2008)

Gautrain Might not be Ready for World Cup

9. (U) Bombela Concession Company CEO Jerome Govender announced that
the Gauteng Provincial Government has not yet committed to
accelerate construction of the rapid-rail Gautrain project. The
Gautrain is a public-private partnership between the provincial
government and Bombela, a consortium consisting of international
partners. Govender emphasized that the first-phase of construction
was contracted for 45-months and would not be completed until the
end of June 2010. This means the system will not be operational in
time for the 2010 FIFA World Cup, which starts on June 9. "We need
a change in the contract - an instruction from government to
accelerate the project - to achieve [a] May target," said Govender.
"We were never contracted to finish the project in time for the
World Cup." The provincial government will have to increase the
budget to acquire the additional resources necessary to speed up
construction, should it want the airport link to be completed in
time. The second phase of the project -which links Johannesburg and
Pretoria- is set to be completed by April 2011. Gautrain Project
Leader Jack van der Merwe said the project team will only know by
QLeader Jack van der Merwe said the project team will only know by
mid-2009 whether it will possible to meet the May 2010 target.
(Engineering News, July 25, 2008)

End of Load Shedding for Johannesburg - City
Power - Wishful Thinking?

10. (U) The City of Johannesburg municipal power supplier City Power
assured consumers that load shedding was a thing of the past,
asserting that City Power had enough electricity even if state power
supplier Eskom requested a cut in supply. City Power Managing
Director Silas Zimu asserted that the municipality's mitigation
program had been successful in producing more than 500 MW of
additional power. "Even if Eskom asked us to load shed, we won't as
the City of Johannesburg," said City Councilor Roslynn Greef. City
Power has trumpeted a number of positive planning measures,
including the installation of smart meters, establishing pricing
incentives, seeking to refurbish inactive gas turbines, and creating
a "virtual power station" based on massive installation of solar
water heaters. However, implementation is still a challenge.

PRETORIA 00001712 004.2 OF 005

Johannesburg consumes about 3,500 MW of power, compared to 3,200 MW
in Paris. (Engineering News, Star, Business Day, July 29, 2008)

The Next, Bigger Crisis - Power Distribution

11. (U) The failure to overhaul the power distribution sector could
cause the next crisis in the electricity industry. The government
has tacitly admitted that it has failed to overhaul South Africa's
vast electricity distribution industry since a plan to consolidate
the sector was first put on the agenda 13 years ago. "One of the
lessons I have learnt in this process is that this restructuring is
extremely complex - it cuts across all spheres of government and we
need constant consultations and persuasion. It if was really
simple, we would have done it long ago," says Nellie Magubane, the
DME's deputy director in charge of electricity. "It is not just
about legislation - it is about money, and the issues are also
political." Electricity is currently distributed by Eskom and 187
municipalities - the fragmented system has been fraught with
financial inefficiency, management problems, and lack of investment
in maintenance and capacity, especially at the local government
level. The government's restructuring plan would entail that Eskom
and the 187 municipalities distributing power be split into six
Regional Electricity Distributors (REDS), which would be easier to
regulate and manage. It would also provide a better way to raise
commercial financing. The REDS fall under the state-owned
Electricity Distribution Industry Holdings (EDI). However, the plan
has proved unworkable, because it relies on municipalities and Eskom
to voluntarily cede to the REDS their power distribution function,
assets, revenues, and staff - without addressing the issues that
affect the REDS. Unless there is a constitutional amendment to give
national government power over electricity distribution,
municipalities will cling to their right to distribute power because
it is their largest single source of income. With municipal
finances in a mess, the lack of investment in electricity
distribution could worsen and cause the next power crisis.
(Financial Mail, July 25, 2008)

South Africa Stopped Zimbabwe Power
Exports Months Ago

12. (U) South Africa stopped supplying electricity to Zimbabwe
several months ago, according to Eskom CEO Jacob Maroga. He said
there was no political motive. "It is simply a contractual issue.
They had been paying for their electricity in advance for the last
two to three years. They simply stopped making new orders." He
said there was no outstanding debt. Eskom said it believed Zimbabwe
was continuing to pay for electricity imports from other regional
countries, which could include Mozambique, Zambia, and the DRC. It
could also include Botswana, but Botswana's government has been
particularly critical of Mugabe since the election. (Engineering
News, July 30, 2008)

Government Proposes New Carbon Taxes

13. (U) Department of Environmental Affairs and Tourism (DEAT)
Minister Marthinus Van Schalkwyk announced a cabinet-endorsed
proposal to introduce incentives and taxes aimed at reducing carbon
emissions. The Minister said that although the tax structure has
not yet been defined, the cabinet has instructed the National
Treasury to investigate the issue and propose new incentives and
taxes. Van Schalkwyk warned that the policy reform could change
South Africa's economic structure over the coming years by
encouraging drastic emission reductions in the transportation sector
and forcing a shift towards public transport. The new policy could
also intensify the development of hybrid and electric cars. As a
coal-based economy, South Africa is listed among the world's largest
carbon dioxide emitters. The government is seeking to nudge
businesses to adopt green programs and cleaner production cultures.
Critics of the proposed taxes argued that the move would be
counter-productive. Chemical and Allied Industries Association CEO
Laurain Lotter said that the taxes would add significantly to the
cost of doing business in South Africa and urged that the government
explore other options. (Business Day, July 29, 2008)

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--------------------------------------------- -
Climate Change Could Destroy Species in Kruger
National Park
--------------------------------------------- -

14. (U) The Minister of Environmental Affairs and Tourism Marthinus
Van Schalkwyk told a climate change conference in Cape Town that
climate change, if not kept in check, could lead to the extinction
of certain animals in the Kruger National Park. Van Schalkwyk cited
a United Nations Panel on Climate Change report which indicated that
a 2.5% rise in temperature could bring about the extinction of 24%
to 40% of mammals, 28% to 40% of birds, and 21% to 45% of reptiles
in the popular conservation park. He encouraged all countries to
fight the eminent catastrophe of climate change. He also added that
"South Africa had to take very difficult and important decisions
relating to its own efforts to reduce and avoid emissions." He said
the country can longer afford not to engage in emission reduction
efforts. According to Van Schalkwyk, South Africa is on the path to
building a low carbon economy, and to developing mitigation and
adaptation mechanisms. (Pretoria News, July 22, 2008)

CITES Criticized for Authorization for
Ivory Sales to China

15. (U) The Convention on International Trade of Endangered Species
(CITES) has approved the sale of 108 tons of African ivory to China.
It noted China's improved crackdown and control of illegal domestic
ivory trade as justification for the approval. Botswana (44 tons),
Namibia (9 tons), South Africa (51 tons), and Zimbabwe (4 tons) will
be authorized to conduct a once-off sale of their ivory stocks.
CITES will closely monitor the ivory sales, while the proceeds will
be allocated to elephant conservation. The governments are pleased
with the CITES authorization, but animal right activists are
enraged. Animal Rights Africa (ARA) is concerned that South
Africa's authorized sale of 51 tons represents approximately 16,000
elephants. ARA figures indicate that 20,000 elephants are killed
annually to service illegal ivory trade. ARA spokesperson Michel
Pickover accused South Africa of not being in solidarity with the
other African states in opposing ivory trade. Eighteen African
nations are opposed to the sales. (Bua News, The Star, and Pretoria
News, July 22, 2008)


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