Cablegate: South Africa Economic News Weekly Newsletter August 29,

DE RUEHSA #1932/01 2460609
R 020609Z SEP 08




E.O. 12958: N/A
2008 ISSUE

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1. (U) Summary. This is Volume 8, issue 35 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Experts Believe Inflation will Peak at 13%
- Land Expropriation Bill Shelved
- 'South Africans Act like Americans'
- Intense Lobbying Expected to Pay-Off for Motor Industry
- Infrastructure Spending to Boost Growth
- Contracts Awarded for Road Upgrades
- ACSA Utilizes Recycled Material for Upgrades
- Eskom Plans to Expand Nuclear Industry and Reprocess
Nuclear Fuel
- Gold Firms Battle Costs and Falling Output
- Engen Comes Clean
- MTN Boosts Profits and Pursues Expansion
- SEACOM Cable Project Moving on Schedule
End Summary.

Experts Believe Inflation will Peak at 13%

2. (U) Statistics South Africa (StatsSA) reported that CPIX
inflation (which excludes mortgage costs) increased from 11.6% in
June to 13% in July. The rise was driven by higher electricity,
food, fuel, and housing costs. Consensus forecasts had predicted
that CPIX, which has now breached the South African Reserve Bank's
(SARB's) 3%-6% target range for 16 months running, would increase by
12.9%. The slightly higher increase did not shake the view that
consumer inflation was close to its peak, and would begin to subside
in 2009, paving the way for cuts in lending rates. The SARB kept
interest rates steady this month, saying CPIX would peak at about
13% in the third quarter, and then start falling "significantly"
early next year. Yields on government bonds, which move in the
opposite direction to prices, fell as much as 18-basis-points on the
news while money markets rallied by a few basis-points. Investec
Economist Annabel Bishop said she expected CPIX to creep above 13%
in August, and then ease towards 11% by year-end as fuel prices
continued to drop. (Business Day, August 28, 2008)

Land Expropriation Bill Shelved

3. (U) Parliament's Committee on Public Works announced that it has
withdrawn the highly contested Expropriation Bill until further
notice. The bill would have allowed the state to take over property
under much easier terms than current legislation allows.
Parliament's own legal advisers reckoned the bill was not
constitutional, principally because it tried to prevent recourse to
the courts for people whose property would have been expropriated.
Public Works Committee Chairperson Thandi Tobias-Pokolo said the
bill was shelved because of a lack of "proper consultation". She
said the decision was reached after consultation with various
stakeholders both within and outside Parliament and in the interest
of broader consultation and effective public participation. She
issued a statement noting that, "Advice sought by the portfolio
committee indicated that more time was needed to ensure that a wide
variety of stakeholders had been consulted and that public
participation may have been insufficient to see the bill through."
(Beeld, August 26, 2008)

'South Africans Act like Americans'

4. (U) Finance Minister Trevor Manuel said South Africans were not
adequately saving. He noted that they were highly indebted and
consuming in a manner that mimicked patterns in the U.S. Manuel
said, "households live on debt and are highly leveraged. It is not
a basis of stability." "If they are borrowing for consumption then
there is something wrong in the equation," he added. Manuel
bemoaned the poor transition time between interest rates increases
and consumer reactions. "The response to rate increases is abysmally
low," he said. By comparison he noted that when a small
25-basis-point rate increase was announced in Europe, the response
was immediate. Instead, South Africans needed increases as high as
700-basis-points "before they bite". The current rate tightening

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cycle in South Africa, which began in June 2006, is at
500-basis-points. Manuel continued to emphasize the need for an
inflation targeting policy, as inflation hit the poor and those
relying on a fixed salary the hardest. He argued that a preferable
price stability level would be 2%. (Beeld, August 27, 2008)

Intense Lobbying Expected to
Pay-Off for Motor Industry

5. (U) Substantial concessions are expected in the new Motor
Industry Development Program (MIDP) after intense lobbying by
automotive manufacturers. The Department of Trade and Industry
(DTI's) accommodations will cost more, and the MIDP needs approval
by the Treasury, which is reluctant to fund the program. Finance
Minister Trevor Manuel sidestepped questions on whether Treasury
would agree to a more expensive program. The automotive industry
has complained about reduced benefits throughout the two-year review
of the MIDP. Treasury believes the cost of the MIDP outweighs its
benefits. In eleventh-hour talks, agreement was evidently reached
late on August 27 for revisions due for release on August 29. DTI
is understood to have made considerable concessions to boost the
benefit of the production allowance to satisfy industry. The new
deal is understood to exclude catalytic converter manufacturers -
whose business is mainly export driven - but a separate program
could be drafted to accommodate export-oriented manufacturers. A
source said: "They shook hands on a final agreement. Some
counterproposals were made and the minister responded to those. The
manufacturers liked that response." An announcement is expected on
September 1, after consultations with the National Union of
Metalworkers of South Africa. The program needs cabinet approval,
so it is likely to be released only by the middle of September.
Industry and government stakeholders were reluctant to speak about
the status of the review, but one industry source said the plan
would go for cabinet approval next week. DTI spokesman Vukani Mde
said an announcement was imminent but he would not give details of
the program. The redrafting of the MIDP was prompted by threats
that it could be challenged at the World Trade Organization (WTO)
because its export-incentive focus did not comply with WTO rules.
The new program will shift from a lucrative export-based incentive
to a production allowance. Automotive manufacturers were concerned
that the production allowance would not offset the loss of export
credits sufficiently. It is believed that DTI yielded to pressure,
and sweetened the production allowance. Another source said
catalytic converters did not fit into the new parameters of the
program, but that DTI had promised to address export-intensive
manufacturers' needs separately. It is understood that a new
program could also accommodate medium and heavy commercial vehicles,
which have also been excluded from the new program. (Business Day,
August 29, 2008)

Infrastructure Spending to Boost Growth

6. (U) The Nedbank Capital Expenditure Report revealed a rise in
Q6. (U) The Nedbank Capital Expenditure Report revealed a rise in
infrastructure investment projects. Eighty new infrastructure
projects valued at around R336.1 billion ($43.6 billion) were
announced during the first half of 2008, compared with announcements
of R194 billion ($25.2 billion) for the full-year of 2007. Capacity
expansion projects by state-owned electricity producer Eskom are the
main contributor to the increase in announced projects. A number of
new private sector initiatives and the expansion of South Africa's
transport infrastructure also contributed to the rise. Sixty-four
private-sector projects worth R72 billion ($9.3 billion) were
announced in the first half of the year, with finance and real
estate accounting for R38 billion ($5 billion) of these projects.
The manufacturing sector also featured strongly with new projects
worth R25 billion ($3.2 billion compared with R15 billion ($2
billion) over the same period last year. Continued buoyant
investment growth should pick up some of the slack from a slowdown
in consumer demand, as household spending is weighed down by a
tighter credit environment, slower real income growth, and lower
levels of consumer confidence. However, strong investment growth is
likely to lead to greater import demand, which will keep the
pressure on South Africa's already sizable current account deficit
(9% of gross domestic product in the first quarter of 2008) and its
financing requirement. Given the country's reliance on foreign

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financing, the greater current account deficit adds to the
depreciation risk associated with the currency. (Beeld and
ABSA-Newsletter, August 26, 2008)

Contracts Awarded for Road Upgrades

7. (U) The South African National Road Agency (SANRAL) has awarded
road construction and rehabilitation company Raubex three contracts
valued at about R1.15 billion ($151 million). Raubex will start
upgrading roads in Gauteng, the Western Cape, and Mpumalanga in
September. Raubex's Construction Division will undertake the R719
million ($95 million) contract that formed part of the Gauteng
freeway improvement project (GFIP) to upgrade National Route 21
(R21). Raubex said that the other two contracts, with a combined
value of R428 million ($56 million), were awarded to its Roadmac
Division. The division would rehabilitate the N11 in Mpumalanga and
the N1 in the Western Cape. SANRAL is investing more than R12
billion ($1.6 billion) in the first phase of the GFIP, which will
improve the N1 to Pretoria, the Johannesburg ring roads, and the R21
from OR Tambo International Airport to Pretoria. The GFIP is aimed
at improving the freeway network ahead of, and beyond, the 2010 FIFA
World Cup. (Engineering News and Fin24, August 27, 2008)

ACSA Utilizes Recycled Material for Upgrades

8. (U) Airports Company South Africa (ACSA) is using recycled
materials to strengthen and widen runways and taxiways in
anticipation of new Airbus A380 flights. The 3.4 kilometer
secondary runway at Johannesburg's OR Tambo International Airport
has been strengthened. Twelve kilometers of taxiways were also
upgraded. The major taxiway was doubled in width from 30 meters to
60 meters and the central strip was strengthened to increase its
load-bearing capacity. The taxiways consumed about 300,000 tons of
aggregate materials that provide bulk in road surface material.
Sixty percent of this bulk contained recycled asphalt material.
About 80,000 tons of other recycled materials were also used as
sub-base material in the road shoulders. The use of recycled
material led to a cost savings of about R15 million ($2 million).
Asphalt recycling is still in its infancy in South Africa, but is
widely used overseas. Industry leaders are keen to promote it in
South Africa. "It makes a lot of economic sense to recycle. The
environmental thing also makes sense. What we're trying to do is
say we need to use this material optimally, to reduce reliance on
virgin materials," said South African Bitumen Association CEO Trevor
Distin. Distin noted that 80% of the asphalt that comes out of
pavements in the U.S. - about 80 million tons per year - is re-used.
In Europe, the volume recycled is close to 50%. (Business Day,
August 28, 2008)

Eskom Plans to Expand Nuclear
Industry and Reprocess Nuclear Fuel

9. (U) South Africa plans to expand its nuclear industry and
diversify its energy mix as it battles a crippling power shortage.
The shortage has hit key mining, smelting, and manufacturing
QThe shortage has hit key mining, smelting, and manufacturing
sectors, trimming growth in Africa's strongest economy. Department
of Minerals and Energy's Nuclear Chief Director Tseliso Maqubela
announced that state-owned electricity producer Eskom is seeking
commercial contracts with foreign companies to reprocess spent
nuclear fuel. Maqubela told Reuters: "The preference is that we
will use existing commercial reprocessing plants in the world for
reprocessing spent fuel." He noted that "in the medium to long-term
we will also look at whether it's economically viable to establish a
reprocessing plant in South Africa, but economically it makes sense
in the short-term that we use existing facilities." Eskom plans to
spend R343 billion ($45 billion) over the next five years to boost
generation capacity. France, Britain, and Japan were likely
countries with whom to partner on the reprocessing project,
particularly with companies such as France's Areva and U.S.-based
Westinghouse Electric, which is majority owned by Toshiba. "The
contracting would be done by Eskom, not by government so I would be
hesitant to give a figure," Maqubela said on the potential value of
the contracts. "Quite clearly something like this would be in the

PRETORIA 00001932 004.2 OF 005

millions of dollars, definitely," he said. Maqubela said
radioactive waste will probably be shipped overseas, where the spent
fuel is reprocessed to produce a "mixed oxide fuel" for re-use in
nuclear reactors. South Africa, which has Africa's largest uranium
reserves, has categorized uranium as a critical mineral. The
recently approved nuclear policy also permits uranium mining to
ensure supply security. The government plans to regulate uranium
exports to secure supplies to Eskom. South Africa plans to build
24-30 new Pebble Bed Modular Reactors (PBMR), with construction of
the first demonstration model planned for 2010. The plant would be
commissioned in 2014, followed by the commercial reactors three
years later. Westinghouse Electric, Eskom, and South Africa's
Industrial Development Corporation are investing billions of Rands
to prove the PBMR technology. (Engineering News and Reuters, August
27, 2008)

Gold Firms Battle Costs and Falling Output

10. (U) New chief executives of Africa's top three gold producers
are seeking novel ways to cut costs and expand output to stay
afloat. AngloGold Ashanti, Gold Fields, and Harmony Gold
(respectively, the world's third, fourth, and fifth-largest
producers) have been bailed out thus far by a strong gold price.
Gold hit a lifetime high of $1,030.80 in March, but a global
economic slowdown has since seen prices tumble to around $826,
removing a shield from ballooning costs and weak output in South
Africa. Analysts said companies have had to dig deeper into mines
that are already the world's deepest, pushing costs higher and
heightening safety risks at a time when the South African mining
sector is hit by a shortage of skilled labor and a spate of labor
strikes. Analyst Nick Goodwin said, "The margins between costs and
the gold price are shrinking, as the companies try to dig out a
wasting asset." Shares of the three firms have underperformed gold
peers in North America and Australia and failed to fully participate
in the gold price rally due to a stronger rand, high costs, power
shortages, and safety shutdowns. AngloGold is favored by investors
compared to its African rivals owing to a wider production base
outside South Africa, which contributes about 40% of its output, and
the group's relatively lower costs. Gold Fields has some 80% of its
total output from South Africa where safety shutdowns slashed 1.1
million ounces from its reserves. Gold Fields' new CEO Nick Holland
wants the group to change from an Afro-centric company and has
tinkered with management structure, after having lost three top
executives this year. "All of this activity is happening at a
difficult time operationally for Gold Fields' South African mines,"
JP Morgan analysts Steve Shepherd and Allan Cooke said. Holland
wants to keep a tight rein on costs rather than look to be bailed
out by the gold price. Gold Fields' production and capital
expenditure rose to $869 an ounce in the June against a gold price
of $895, reflecting a tight margin. Holland wants to cut this to
$725. Harmony Gold CEO Graham Briggs has sold mines and slashed the
Q$725. Harmony Gold CEO Graham Briggs has sold mines and slashed the
workforce. Analysts said Harmony must find higher-margin,
lower-risk mines and sell the low-grade mines on which it was
founded. AngloGold CEO Mark Cutifani has targeted expansions
outside of South Africa, with newly acquired mines in Brazil and
Argentina, a strategy also favored by its rivals as they seek to
diversify. Harmony broadened its global footprint with the
joint-venture Hidden Valley project in Papua New Guinea. Gold
Fields' has bet its expansions on a $550 million Peru mine. (Mining
Weekly and Reuters, August 27, 2008)

Engen Comes Clean

11. (U) Durban-based petroleum refinery and fuel supply group Engen
claimed to have spent over R60 million ($7.8 million) on
environmental improvements over the last decade and to have reduced
its emissions by 60%. Managing Director Willem Oosthuizen described
the investment as a part of Engen's efforts to receive an ISO 14001
certificate. The ISO 14001 is administered and enforced by the
South African Bureau of Standards, and the process for certification
entails rigorous site emissions audits. Each plant must create a
monitoring system to track potential negative environmental impacts
in order to comply with the ISO process. Oosthuizen said it was a
"milestone that was part of a journey which Engen started in 1999
when the refinery started voluntary emission reductions." Community

PRETORIA 00001932 005.2 OF 005

Liaison Forum's Environmental Representative Lawrence Vartharajulu
congratulated Engen and noted that there was still room for
improvement. (Engineering, August 1-7, 2008)

MTN Boosts Profits and Pursues Expansion

12. (U) Sub-Saharan Africa's biggest mobile phone operator MTN
posted a 26% rise in first-half adjusted earnings per share (EPS).
The South African-based company said the adjusted EPS was in line
with the company's forecast for a rise of 23.3 to 28.3%. Subscriber
numbers jumped 53% to 74.1 million. However, MTN lost market-share
in Nigeria (from 44% to 43%) as it faced stiff competition from the
arrival of Kuwait's Zain Telecom. Subscriber numbers in Nigeria
increased 12% to 18.6 million. Growth also slowed in South Africa,
where the market is maturing and competition is cut-throat, with a
5% rise in subscribers to 15.6 million. MTN held failed merger
talks this year with India's Bharti Airtel and Reliance
Communications. Some analysts say it could still fall prey to a
foreign buyer. MTN did not give concrete forecasts, but said
prospects for the second half remained "positive" despite
increasingly competitive markets. It said it would focus on
expanding in emerging markets. MTN has been banking on its new
venture in Iran, which some investors deem risky given Iran's
nuclear stand-off, to boost subscribers as growth in Nigeria and
South Africa slows. It said Irancell boosted its subscriber base by
93% to 11.6 million. (Engineering News, August 28, 2008)

SEACOM Cable Project Moving on Schedule

13. (U) SEACOM announced that about 10,000 kilometers of the 15,000
kilometer SEACOM fiber-optic, undersea cable has already been
manufactured in the U.S. and Japan. "Our manufacturing and
deployment schedule is on target and we are confident that we will
meet our delivery promises in what is today an incredibly tight
market underpinned by a skyrocketing demand for new cables and
resulting in worldwide delivery delays," said SEACOM President Brian
Herlihy. The SEACOM cable has been structured to meet the policy
objectives of participating governments and the New Partnership for
Africa's Development (NEPAD), and will be the first to launch
services with a planned ready-for-service date of June 2009. The
cable's two fiber pairs will have a capacity of 1.28 terabits per
second, to enable high-definition television (HDTV), peer-to-peer
networks, and Internet Protocol Television. Once completed, it will
connect Southern and East Africa with Europe and South Asia and help
meet the surging demand for lower-priced Internet on the African
continent. Project contractor Tyco Communications will begin
shipping terrestrial equipment this month. SEACOM also reported
that laying of shore-end cables for each of the landing stations
would also start in September. "We are very happy with the progress
made over the past five months. From October 2008, the first of
three reliance class vessels will start laying the actual cable. The
final splicing, which involves connecting all cable sections, will
Qfinal splicing, which involves connecting all cable sections, will
take place in April 2009. This is expected to allow enough time for
systems testing before the commercial launch in June. The cable is
planned for service before the 2010 FIFA World Cup kick-off and
SEACOM has been working with key broadcasters to meet their
broadband requirements. The team is also trying to speed up
construction in an attempt to assist with the broadcasting
requirements of the FIFA Confederations Cup scheduled for June


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