Cablegate: South Africa Economic News Weekly Newsletter August 22,

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TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
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SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER AUGUST 22,
2008 ISSUE

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1. (U) Summary. This is Volume 8, issue 34 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Mining and Manufacturing Boost GDP Growth
- Slowdown Weighs on Construction Sector
- ABSA to Lend for Old Township House Upgrades
- Taxi Industry Draws Battle Lines Against Proposed Bus Rapid
Transit Systems
- Eskom to Increase Its Base-load Capacity Through Independent Power
Producers
- Power Cuts Threaten Aluminum Smelters
- Broaddand Infraco Expected to Receive License, but It's West Coast
Cable Project Not Likely to be Ready for World Cup.
- Ambient Air Quality Monitors for Hot Spots
End Summary.

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Mining and Manufacturing Boost GDP Growth
-----------------------------------------

2. (U) South Africa's GDP rebounded markedly to 4.9% q/q (4.5% y/y)
in the second quarter of 2008 from 2.1% q/q (4.0% y/y) in the first
quarter of 2008. The recovery was largely the result of a rebound in
the mining and manufacturing sectors after a slump in the first
quarter caused mainly by electricity supply disruptions, which saw
mining production at some large mines shut down for several days and
power supplies to large industrial users being curtailed. Growth in
the mining sector jumped 15.6% q/q in the second quarter after
dipping 22.1%, while the manufacturing sector grew 14.5% q/q (4.9%
y/y) from -1% q/q in the first quarter (1.1% y/y). As expected,
activity in the consumer-sensitive sectors was weighed down by high
interest rates, the impact of the National Credit Act (NCA), and
plummeting consumer confidence. For instance, the wholesale, retail
trade and hotels sector contracted 2.2% q/q after rising 3.6% in the
first quarter. Although the q/q data are subject to large base
effects, the y/y data, thanks to a surge in manufacturing, does
suggest a somewhat resilient economy, which should dispel
recessionary fears. Nonetheless, the production-side data suggest
that tighter monetary policy has had an impact on consumption
spending. Most economists believe that the latest GDP data provide
little reason for the SARB to change course on monetary policy, and
that a combination of a more favorable inflation outlook and a
moderation in economic activity will see the SARB on hold for the
rest of the year, with the potential for interest rates to start
falling in the second quarter of 2009. (ABSA-Newsletter, August 20,
2008)

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Slowdown Weighs on Construction Sector
-------------------------------------

3. (U) According to Statistics South Africa (StatsSA), private
sector building plans passed by municipalities decreased by 18.3% in
the second quarter of 2008, indicating that investment in
residential properties remained under severe strain, while strength
in the commercial sector may have also begun to wane. This follows
news of a slowdown in South Africa's booming construction sector
over the same period, as rising debt costs and a slowdown in
domestic demand takes the edge off double-digit growth seen since
the start of 2004. ABSA Bank Property Analyst Jacques du Toit said
the residential building statistics not only confirm the current
Qthe residential building statistics not only confirm the current
slowdown in the housing market, but also indicates that conditions
in this segment of the property market will remain subdued for the
rest of the year and into 2009. Building plan statistics are seen
as an important leading indicator for the property market, which has
been knocked by the cumulative five-percentage-point increase in
lending rates seen since mid-2006. (Business Day & Beeld, August
21, 2008)

--------------------------------------------- --------
ABSA to Lend for Old Township House Upgrades JSE Down
--------------------------------------------- --------

4. (U) ABSA bank, South Africa's largest home loan lender, launched
a program to finance extensions and upgrades to old township houses.
Managing Executive for ABSA Home Loans Luthando Vutula said the
program is aimed at helping people create personal wealth. Township
houses could only be rented prior to 1994. After 1994, the new

PRETORIA 00001893 002.2 OF 004

government launched a campaign to give titles to the occupants.
"What is important is that we understand there is a slowdown in new
housing developments as a result of escalating building costs and
the shortage of land, and therefore we have had fewer new houses
available in the market. We understand that people in old township
houses want to improve their lifestyle," said Vutula. The loans for
extensions could range from R20,000 ($2,600) to R400,000 ($52,000),
depending on the borrower's monthly income and the value of the
property. (Business Day, August 21, 2008)

--------------------------------------------- ----
Taxi Industry Draws Battle Lines Against Proposed Bus Rapid
Transit Systems
--------------------------------------------- ----

5. (U) The minibus taxi industry vowed to fight the government for
lack of consultation over the implementation of the proposed Gauteng
bus rapid transit (BRT) system. The General Secretary of the South
African National Taxi Council (SANTACO) Philip Taaibosch said, "We
will make use of all avenues available to us to protect the rights
of taxi operators." SANTACO felt that its business was threatened
by the proposed BRT systems for Johannesburg and Pretoria.
Taaibosch said the taxi industry was not opposed to the Gauteng
transformation strategy; however, the industry needed to be involved
as it was an integral part of the transport system. He noted that
the taxi industry moved the largest percentage of the commuting
public and yet the industry was not involved in the BRT system.
(Business Report and Engineering News, August 18-19, 2008)

--------------------------------------------- ---
Eskom to Increase Its Base-load Capacity Through Independent Power
Producers
--------------------------------------------- ---

6. (U) State-owned power utility Eskom issued a request for
qualification (RFQ) from national and international companies for
the development of its multi-site base-load independent power
producer (IPP) program on August 17. Eskom is seeking to secure
between 2,100 MW and 4,500 MW of power from private developers with
a minimum plant capacity of 200 MW. Eskom had called for an
expression of interest for new base-load IPPs in April to address a
potential power supply gap after two new coal fired base-load
stations - Medupi and Kusile - are commissioned, and before the
planned nuclear power station (scheduled for 2017) is up and
running. Eskom received expressions of interest from a "fairly
global mix" of 76 companies, HSBC Africa Senior Vice-President Paul
Eardley-Taylor said. HSBC Africa is the lead financial adviser to
Eskom on the multi-site base load IPP program. The program would be
developed on a build-own-operate basis, and the term of the contract
would be 25 years. The IPP company would be required to enter into
an equivalent-term agreement with a fuel supplier to procure fuel
supply. Interested parties were required to select sites in South
Africa based on access to fuel, transmission infrastructure, and
water sources. Connection to the Eskom transmission grid would be
made in compliance with the terms of the Grid Code as published by
the national regulator. Eskom had previously indicated that it
Qthe national regulator. Eskom had previously indicated that it
could pursue a hybrid-type Eskom/private sector IPP arrangement.
Under a hybrid structure Eskom could complete much of the upfront
planning and engineering design. The RFQ stage of the process would
not require a detailed proposal, but a company would need to show
experience in the industry and prove that it could qualify for the
bidding process, Eardley-Taylor stated. The RFQ followed a Cabinet
announcement in September 2007, which designated Eskom as the single
buyer of power from IPPs. Shareholder arrangement criteria are
being finalized, and they are expected to include a minimum of 25%
shareholding to be allocated to black economic-empowerment compliant
investors. (Engineering News, August 18, 2008)

-------------------------------------
Power Cuts Threaten Aluminum Smelters
-------------------------------------

7. (U) BHP Billiton sounded the death knoll for the $3.25 billion
Coega aluminum smelter, stating that there would be no extra local
aluminum capacity built until 2018 due to Eskom's power cutbacks.
BHP Billiton CEO Marius Kloppers said the rationing would prevent
the construction of new smelters or the expansion of existing units.
Rio Tinto, which BHP Billiton is seeking to buy, was planning to
make a decision on proceeding with the Coega smelter later this

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year. However, the power crisis in January resulted in Rio Tinto
putting the Coega smelter on hold until at least 2012, when Eskom is
expected to complete the first of its new base-load power stations.
Eskom had agreed to supply the Coega smelter with 1,350 megawatts in
November 2006 before the power cutbacks. Coega Aluminium
spokesperson Robert Valdmanis was not available to comment on
whether the status of the project had changed. BHP Billiton
operates three smelters in Southern Africa that have been disrupted
by the power curbs. In Richards Bay it owns the Hillside and
Bayside smelters. In Maputo it has a 47.1% stake in the Mozal
smelter. BHP Billiton said in March that it would partially close
the Bayside aluminum smelter, while the Hillside smelter and the
Mozal plant would run at reduced capacity. "There's going to be no
power for a long time and I'm very surprised that people are still
talking about building new capacity," Kloppers said. He stressed
that there would not be capacity expansions at BHP Billiton's local
smelters "under almost any scenario that I can envisage for at least
the next decade". The group said annual earnings from its aluminum
operations fell 21% because of a weaker dollar and as output from
South Africa fell 8% following power shortages. Energy makes up
about 40% of the cost of producing aluminum. (Business Report,
August 18, 2008)

--------------------------------------------- ------
Broaddand Infraco Expected to Receive License, but It's West Coast
Cable Project Not Likely to be Ready for World Cup.
--------------------------------------------- ------

8. (U) Minister of Communications Ivy Matsepe-Casaburri is expected
to issue a policy direction for the Independent Communications
Authority of South Africa (ICASA) to license Broadband Infraco. The
State-owned broadband infrastructure company will negotiate the
license terms and conditions directly with ICASA. Broadband Infraco
CEO Dave Smith said licensing the entity would enable it to reduce
the cost of national and international long-distance broadband
connectivity. Smith noted that the Electronic Communications
Amendment Act, which came into effect in February, would encourage
investment in the sector. In his State of the Nation address in
February, President Mbeki said the licensing of Infraco would be
completed this year and that, by working with other governments on
the continent and with the private sector, the process of launching
the African West Coast Cable (AWCC) - the undersea cable linking
Cape Town with London - would also be completed. The cable, which
will cost $510-million, will have units branching to at least ten
countries along the West Coast of Africa. "There will be no central
pricing agreements and all participants will market their capacity
independently of each other in a competitive environment," Smith
said. He added that "as far as possible, participants will get the
same rights to expand and trade their capacity as if they had built
their own independent cable system." The government will remain the
major shareholder, owning more than 25% of the equity. While the
cable was originally intended to be completed in time for the 2010
Qcable was originally intended to be completed in time for the 2010
FIFA World Cup, a delay in the finalization of the commercial and
legal agreements means that the project will now only be completed
after the World Cup. According to press reports, the World Cup
traffic will be carried on Telkom's upgraded Sat-3 system.
Provisional arrangements might also be made to carry 2010 World Cup
traffic on the AWCC by completing the section of the cable that
connects to Portugal from the northern branching unit before the
World Cup. (Engineering News, August 15, 2008)

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Ambient Air Quality Monitors for Hot Spots
------------------------------------------

9. (U) The Department of Environmental Affairs (DEAT) and the
Mpumalanga provincial Department of Agriculture and Land Affairs
(DALA) have installed new air quality monitoring stations in one of
South Africa's air pollution hot spots, a 31,106 square kilometer
area encompassing the small towns of Balfour, Middleburg, Standerton
and Witbank, in the near eastern part of the country. Pollution in
these areas is created mostly by heavy industry operations,
residential coal burning and veld fires. According to the DEAT
Deputy Minister Rejoice Mabudafhasi, the air quality monitoring
stations will help mitigate pollution. She said they would be able
to identify pollutants and the specific areas from where they came.
The stations would be able to detect and measure pollutants such as
benzine, carbon monoxide, lead, sulphur dioxide etc. The data
collected would be made available to the general public and relevant

PRETORIA 00001893 004.2 OF 004

stake holders such as the Air Quality Officers Forum, in which all
the municipalities in the priority areas are represented.
Mabudafhasi also noted that once a polluter was identified,
especially the heavy industry companies, DEAT would show them their
levels of pollution and then work with them to remedy the situation
over a stipulated time frame. She also added that polluters could
subjected to fines or jail terms if they were recalcitrant or
ignored reform time frames. The monitoring stations were installed
at a cost of R1million ($134,000) each, with the financial
partnership of DALA and the Royal Danish Embassy. (Engineering
News, August 18, 2008)

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