Cablegate: South Africa Economic News Weekly Newsletter August 8, 2008

DE RUEHSA #1773/01 2250650
R 120650Z AUG 08




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1. (U) Summary. This is Volume 8, issue 32 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Inflation: Mboweni 'Concerned'
- Manufacturing production recovered in June
- COSATU Strike Impacts Economic Activity
- 'Black Diamonds' Lose Shine
- Consumers Feeling Pain of Increasing
Interest Rates
- New Freight Rail Command Center Launched
- Toyota to Acquire Full Ownership of South African
- Eskom Sets Aside Funds for Air Quality Safeguards at
Newest Power Station - Faces Challenges over Price Hike
- Gold Fields in Safety Fix
- Local Manufacturers to Benefit from Switch to Digital

End Summary.

Inflation: Mboweni 'Concerned'

2. (U) South African Reserve Bank (SARB) Governor Tito Mboweni said
that monetary authorities are concerned because inflation in South
Africa is outside the SARB's 3% to 6% target band. Mboweni noted
that initial supply-side pressures have expanded to include more
generalized pressures. "The core inflation rate is still above the
upper limit of the inflation target," he said. He scotched talk
that inflation targeting was not working and should be abandoned,
emphasizing that it promoted accountability in the management of the
economy, and allowed for greater policy consistency and better
coordination. Mboweni rejected the argument that alternative
instruments could be used to fight inflation. "There is growing
consensus around the world that the pursuit of price stability is in
the interest of sustained economic growth and development and not in
opposition to it," said Mboweni. (Beeld, August 6, 2008)

Manufacturing production recovered in June

3. (U) South Africa's manufacturing production rose 6.1% y/y in June
from an upwardly revised 1.1% gain in May (previously 0.7%). The
rebound in the manufacturing data was surprisingly out of sync with
developments in the PMI (purchasing manager index) business
sub-index, which recorded a sharp decline in June to 38.7 from 47 in
May. The PMI business sub-index surveys actual production and has in
recent months served as a good indicator of likely manufacturing
production. The South African Reserve Bank (SARB) is unlikely to
view the data as an indication of overall resilience in the economy.
Both retail and vehicles sales already offer evidence that
consumption expenditure (which makes up about 60% of GDP) is under
pressure from increased debt servicing costs and inflation. Many
analysts remain of the view that a combination of weak economic
activity and an improved inflationary outlook will see the SARB
leave rates on hold at the Monetary Policy Committee meeting on
August 14. (ABSA Capital Research, August 8, 2008.)

COSATU Strike Impacts Economic Activity

4. (U) The strike on August 6 by the Congress of South African Trade
Unions (COSATU) over high food and fuel costs affected production
activity throughout the country. In the mining sector, which had
Qactivity throughout the country. In the mining sector, which had
been hard hit by electricity supply disruptions earlier in the year
and continues to operate with below-normal electricity supplies, the
impact of the strike was mixed. Some companies reported that around
70% of their workers reported for work at some mines, while in other
cases only 29% of workers went to work. The public transport system
was badly disrupted, which had ripple-effects throughout most
sectors of the economy. However, these effects may be mitigated by
contingency plans put in place by many companies to make up for lost
production. (ABSA-Newsletter, August 7, 2008)


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'Black Diamonds' Lose Shine

5. (U) Research shows that rising interest rates, inflation, and
food and fuel prices have affected members of the emerging black
middle class the most. According to a survey by the TNS Research
group, 10% of the black middle class have had items repossessed in
the last 12 months. Twenty percent of those surveyed said they
never seem to be able to pay off their debts while half had
outstanding bills with retailers. "Black diamonds are starting to
feel the pinch of the credit meltdown," said the survey. The
emergence of black consumers with significant spending power has
been one of South Africa's proudest post-Apartheid stories. But the
levels of borrowing needed to fuel a sharp rise in home and car
ownership are now threatening the phenomenon. (Beeld, August 7,

Consumers Feeling Pain of Increasing
Interest Rates

6. (U) Evidence of a downturn is widespread as many consumers have
overreached themselves and are struggling to make payments, now that
the prime rate is at 15.5%. According to Johannesburg-based Aucor
Auctioneers, the firm is being handed approximately 6,000
repossessed vehicles every month by banks, ranging from Aston
Martins to sports utility vehicles. The impact is also being seen
in the new car market. The latest figures from the National
Association of Automobile Manufacturers of South Africa (NAAMSA)
show that sales of new vehicles slumped by nearly 26% in June 2008,
to the lowest level in more than four years. Research also shows
that almost 2,000 homeowners are having their property repossessed
every month. South African Banking Association Chief Executive Cas
Coovadia said the biggest losers are those trying to secure a
foothold at the top. "The information we receive from banks
indicates that the upper class with home loans from R2-5 million
($270-$670 thousand) were the worst affected," said Coovadia. "These
people have accumulated a string of expensive assets and are now
finding it hard to maintain their lifestyles," he added. According
to the Bureau of Market Research at the University of South Africa,
household debt surged from R290.7 million or 39% of GDP in 1998 to
R1.04 billion or 48% of GDP in the first quarter of 2008. (Beeld,
August 7, 2008)

New Freight Rail Command Center Launched

7. (U) Minister or Public Enterprise Alec Erwin inaugurated the new
Transnet Freight Rail (TFR) national operation centre (NOC) in
Johannesburg on August 4. The state-of-the-art facility has been
modeled on operation centers run by U.S. Burlington Northern and
Union Pacific rail companies. The NOC will operate 24 hours a day
and provide real-time information on cargo movement, with the
management of infrastructure, the rolling stock, and maintenance
"under one roof" for the first time. TFR CEO Siyabonga Gama said
that the NOC was central to TFR's plans to materially improve the
reliability and availability of the country's rail network.
Transnet CEO Maria Ramos added that the NOC was also integral to
QTransnet CEO Maria Ramos added that the NOC was also integral to
Transnet's "ambitious" growth targets. Transnet hopes to raise its
rail volumes from 181 million tons to over 238 million tons by
2012/13, or 31.5% over the three-year period. To achieve this, the
TFR's troubled general freight business (GFB) would have to grow at
6.5% a year, while iron-ore volumes would need to rise by 7.3% and
coal by 3.6%. "It is critical that we get our freight system
efficient," Erwin said, noting, "It's critical that we begin to
shift some of the freight off the roads and back onto rail. And, it
is critical that we provide a responsive and sophisticated service
to the many customers in South Africa." He said that since South
Africa is "a long way from the world's major markets," the
efficiency of the transport sector would be crucial to ensuring that
its companies remained competitive. While few road users would
disagree with Erwin's sentiments, the TFR could face resistance from
road haulers, who have already shown themselves to be far more agile
and competitive than Transnet. There is concern that, while haulers
have to compete aggressively, government policy allows TFR to remain
a monopoly for years to come. The bigger Transnet group stated that

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it planned to extract "synergies" from its control of South Africa's
rail, ports, and pipeline infrastructure. (Business Day, July 28,

Toyota to Acquire Full Ownership
of South African Subsidiary

8. (U) Toyota Motor announced that it would gain full ownership of
its South African subsidiary by late August. Toyota reached an
agreement with its joint venture partner Wesco Investments to
acquire the remaining 25% stake in Toyota South Africa, worth about
R2.03 billion ($274 million). By making the South African unit a
wholly-owned subsidiary, Toyota plans to boost local production,
sales, and exports. Toyota South Africa sold 153,000 units last
year. (Business Report, August 6, 2008)

Eskom Sets Aside Funds for Air Quality
Safeguards at Newest Power Station - Faces
Challenges over Price Hike

9. (U) State power utility Eskom is finalizing tenders for an up to
R5 billion ($700 million) investment into flue gas desulphurization
(FGD) technology for its Kusile power station (formerly known as
Bravo), being built near Witbank, in Mpumalanga. This first-time
deployment of FGD technology in South Africa would be used to remove
sulfur from the exhaust flue gases. "Eskom is fitting FGD to the
Kusile plant as an atmospheric emission abatement technology to
ensure compliance with air quality standards," CEO Jacob Maroga
announced on August 5. The eagerly awaited 4,818 MW coal-fired
power station will be ramped up in six 803 MW chunks between 2013
and 2017, hopefully resolving South Africa's power woes as it
reaches completion. The water-intensive FGD technology was chosen
in a trade-off between adding to the plant's water footprint and
reducing atmospheric emissions in an area already suffering from a
high level of air pollution from coal-fired power stations. Eskom
has signed a letter of intent with Anglo Coal South Africa to supply
the plant with 17-million tons of coal over its 47-year life. The
coal would be supplied through Anglo's empowerment subsidiary Anglo
Inyosi Coal, with first coal deliveries expected in 2011, well
before the start-up of the first unit in 2013. Anglo Coal indicated
that the coal would likely be transported by a dedicated conveyor
system, consistent with the intention of the government, Eskom, and
Transnet to diversify logistical solutions to relieve pressure on
the province's road network. Eskom executives also completed their
road show tour last week of Europe's financial capitals, touting
their detailed recovery plan, including the regulator's approval of
a 27% hike in electricity prices this year. (Engineering News,
Mining Weekly, Business Report, August 6, 2008)

Gold Fields in Safety Fix

10. (U) Global gold producer Gold Fields will lose about 12% of its
South African production in the current financial year after a
safety check revealed that it needed to make substantial repairs to
the main shaft at its 2,000-meter deep Kloof Mine. Safety is a top
priority for mining groups in South Africa due to a spate of mining
Qpriority for mining groups in South Africa due to a spate of mining
deaths in the past year. One of the worst accidents happened in
May, when a lift cable snapped at Gold Fields' South Deep Mine,
killing nine workers. New CEO Nick Holland said that a review of
infrastructure at the entire group's South African mines showed that
the steelwork at the main shaft at 40-year old Kloof Mine had
deteriorated substantially and needed to be repaired. Analysts
noted that this significant closure due to maintenance backlog was
unprecedented in South Africa and could generate a "knock-on" effect
for more costs industry-wide, but they were generally positive about
Gold Field's decision. Meanwhile, Gold Fields announced that it had
switched to fully-mechanized mining at its 3,000-meter South Deep
Mine, necessitating a lay-off of 1,885 workers. A National Union of
Mineworkers spokeswoman said the workers refused to be redeployed to
Kloof and Beatrix Mines because of "the company's poor safety
record." She said, "They opted to go home rather than risk their
lives there." The government has yet to publish the results of the
safety audit called for by President Thabo Mbeki, which was due for

PRETORIA 00001773 004.2 OF 004

release last month. (Mining Weekly, the Weekender, Business Report,
August 3-4, 2008)

Local Manufacturers to Benefit from Switch
to Digital Broadcasting

11. (U) Minister of Communications Ivy Matsepe-Casaburri announced a
cabinet decision to approve the long-awaited Broadcasting Digital
Migration (BDM) policy. The policy provides a framework for South
Africa to start the migration from analogue to digital broadcasting
starting November. She said the Cabinet had also approved the
manufacturing of set-top-boxes (STBs), which would allow households
with analogue television sets to convert the digital signal to
analogue signal. Matsepe-Casaburri said the migration from
analogue to digital broadcasting would boost the development of
South Africa's local electronics manufacturing sector, and that a
number of companies able to manufacture STBs had already been
identified. The local manufacturers had the potential to
manufacture up to 5.6 million STBs a year, which also created export
opportunities. The installation, repair, and sale of the STBs would
also create jobs. The STBs were likely to cost between R400 ($54) a
box and R700 ($95) a box and the government would provide an
ownership support program to fund up to 70% of the cost of an STB
for about five-million of the poorest television-owning households.
This would cost government R2.45 billion ($331 million) during the
three-year dual-illumination period. This funding could come from
the universal service and access fund, which telecommunications
companies and broadcasters contribute to. The BDM policy was in
line with a decision taken by the International Telecommunication
Union that all European, African and Middle Eastern countries should
migrate from analogue to digital broadcasting services by 2015. In
2007, Cabinet decided that the analogue signal to be switched-off on
November 2011. The Department of Communications stated that it was
on track to switch-on the digital signal on November 1, 2008, and
said it would provide digital broadcasting and mobile television for
the 2010 FIFA World Cup. Digital broadcasting would allow for the
provision of services in multiple languages, and would give the
public access to government information and services. (Business Day
and Engineering News, August 7-8, 2008)


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