Cablegate: South Africa Economic News Weekly Newsletter Septmeber 26,

DE RUEHSA #2136/01 2710602
R 270602Z SEP 08




E.O. 12958: N/A
2008 ISSUE

PRETORIA 00002136 001.2 OF 006

1. (U) Summary. This is Volume 8, issue 39 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Economic Policies Expected to Remain
Consistent under Mothlanthe
- Record CPIX Increase in August
- Fears of Retail Recession Increase
- Ford and GM to Reduce SA Workforce
- BMW to Announce 3-Series Production
- Eskom Walks Timing and Funding Tightrope
as Nuclear Decision Nears
- Eskom Considers Other Power Stations
and Renewable Energy
- PetroSA's Coega Refinery May Treat
Venezuelan Heavy Crude
- Political Change Could Deter Telkom Plans
- SAG to Appeal Court Ruling and Pursue
"Managed Liberalization"
- Trump Enters SA Market
- SA and Brazil to Improve Air Connections
- Nationwide to Enter Full Liquidation
End Summary.

Economic Policies Expected to Remain
Consistent under Mothlanthe

2. (U) Newly elected President Kgalema Motlanthe moved quickly to
reassure South Africa and the world that there would be no policy
changes by his new interim administration. "Mine is not the desire
to deviate from what is working. It is not for me to reinvent
policy. Nor do I intend to reshape either cabinet or the public
service," Motlanthe emphasized. On economic policy, ANC president
Zuma also confirmed that "economic policies will remain stable,
progressive and unchanged", which is in line with industry analysts'
belief that there will not be any dramatic policy shifts in the
coming weeks. However, some policies such as inflation targeting
are already under the spotlight and are likely to be reviewed after
the 2009 elections. A number of cabinet ministers, including
Finance Minister Manuel, resigned on September 23 in a show of
respect for ousted President Thabo Mbeki. Manuel's resignation took
the markets by surprise, with the rand plummeting 2.5% and the yield
on 2015 government bonds surging by 20 basis-points to 9.12%.
However, some market recovery occurred after Manuel confirmed that
he was willing to serve in the new administration. The rand also
gained ground against most major currencies, particularly against
the dollar because of turmoil in the U.S. banking and financial
sector, after Motlanthe was sworn-in on September 25. On the future
of fiscal policy, Manuel said that significant changes to the budget
are unlikely and that economic policies decided upon at the ANC
Conference at the end of 2007 continued to inform a number of
issues. Manuel added that the release of the Medium Term Budget
Policy Statement was proceeding according to plan and would be
released on October 21. ABSA Capital expects continued rand
volatility and some weakness on domestic developments, but that
weakness is likely to be tempered by international market
developments and the potential for large foreign direct investment
inflows in coming weeks. (ABSA Capital and Business Day, September
25-26, 2008)

Record CPIX Increase in August

3. (U) South Africa's targeted consumer price index inflation (CPIX)
jumped from 13.0% in July to a record 13.6% y/y in August. The
Qjumped from 13.0% in July to a record 13.6% y/y in August. The
increase beat forecasts and is clouding the interest rate outlook in
South Africa. Food, fuel, and electricity price increases were once
again the main drivers of CPIX inflation, with the rise in the food
component accelerating from 18.5% in July to 19.2% y/y in August.
The shift in the property tax survey from July to August, which was
based on new property valuations in many metropolitan areas, also
added to inflationary pressures. The South African Reserve Bank
(SARB) had previously predicted that CPIX would peak at an average
13% in the third quarter of 2008. SARB Governor Tito Mboweni now
believes that inflation will remain higher than expected, despite
changes to the consumer price basket which go into effect next year.

PRETORIA 00002136 002.2 OF 006

"Our simulations indicate inflation will still be higher than
expected," Mboweni noted. He did not expect inflation to reach the
targeted 3-6% band until the second quarter of 2010. The SARB's
Monetary Policy Committee (MPC) has raised interest rates by 500
basis points since June 2006 in attempts to bring CPIX back down to
the targeted band. However, the MPC left the key repo rate
unchanged at 12% last month, citing an improved long-term inflation
outlook. Analysts believe the SARB will leave the interest rate
unchanged for the remainder of the year, with possible interest rate
cuts in 2009 as the impact of base effects and changes in the
consumer price basket become clearer. (ABSA Capital and Engineering
News, September 23, 2008)

Fears of Retail Recession Increase

4. (U) Retail sales fell 4.6% in July compared with the same month
last year. This is the sharpest annual fall since records began a
decade ago, fanning fears that the sector is sliding into a
recession. Soaring inflation, the rising cost of debt, and a sharp
slowdown in the growth of disposable income has curbed consumer
spending, the economy's main growth engine since 2006. "Growth in
real retail sales has been in negative territory for three
consecutive months, setting the scene for a recession in the
sector," said Standard Bank Economist Johan Botha. "The outlook
remains poor over the medium term ... retailers are not only
suffering falling demand but also rising input costs, which have
consistently impacted on profitability," he added. Analysts
predicted that things would get worse before they got better.
Investec Economist Annabel Bishop explained that retail sales growth
could tentatively turn positive in the second quarter of 2009 and
then strengthen during the year if lower inflation and interest rate
cuts materialize as expected. Retail and wholesale sales are the
economy's third-biggest sector, making up about 14% of gross
domestic product. (Business Day, September 25, 2008)

Ford and GM to Reduce SA Workforce

5. (U) Ford Motor Company South Africa and General Motors South
Africa (GMSA) are set to reduce total workforce due to weak sales
expectations throughout 2008 and into 2009. Ford has cited
increasingly difficult macro-economic pressures, including high
interest and inflations rates for the reduction. The rapid
devaluation of the rand earlier this year also challenged the
industry by increasing the cost of imported components. The rand
devalued by 29% against the euro and 22% against the yen in the
first three months of 2008. GMSA African Operations President Steve
Koch emphasized that if the rand continued to devalue against the
major currencies, it would put "a lot of pressure on producing cars
in South Africa." GMSA will reduce its workforce by 1,000 people by
the end of December 2008. Kock said it "is a significant move and
we'll be at a cost competitive level in terms of our local
manufacturing," after the reduction. Both companies will attempt to
achieve the workforce reduction through voluntary separation
Qachieve the workforce reduction through voluntary separation
packages. Kock emphasized that the South African automotive
industry had to improve the cost-competiveness of materials as well
if it was to have any chance of growing the domestic sector as it
needed to. At current productivity levels, material costs to build
an Isuzu pick-up at GM's South Africa plant are about 30% to 40%
higher than the cost to produce the same vehicle in Thailand.
Material costs accounted for more than 80% of the cost of building a
vehicle in South Africa since a significant portion of inputs are
imported. South Africa tends to produce in low volumes and the lack
of skilled employees also adds to the bill. Koch explained that
high material costs can be reduced by higher-volume local production
and closer alliances between components and vehicle manufacturers -
both of which are proposed by government's new Automotive Production
Development Program (APDP) which is set to replace the Motor
Industry Development Program (MIDP) that expires in 2012. (Business
Report and Engineering News, September 12-15, 2008)

BMW to Announce 3-Series Production

6. (U) BMW has agreed in principle to build its next 3-Series sedan

PRETORIA 00002136 003.2 OF 006

in South Africa, following the unveiling of the government's new
Automotive Production & Development Program (APDP) support scheme
for the motor industry. BMW Chairman Norbert Reithofer explained
that the final decision is contingent upon the signing of a
memorandum of understanding (MOU) that confirms the terms of the new
APDP. Details of the APDP still have to be finalized and it will be
approved only in mid-2009. During a visit to South Africa in early
September, Reithofer announced that President Thabo Mbeki and
Department of Trade & Industry (DTI) Minister Mandisi Mpahlwa had
promised the MOU guaranteeing investment terms. The main provisions
of APDP are due to start in 2013, but some investment rules will
begin changing in 2009. Reithofer explained that a decision on
global production of the next 3-Series should have been made months
ago but was postponed because of South Africa's delay in announcing
the details of the APDP program. He is now "comfortable" with the
new program. The next 3-Series sedan is due to go into production
in Germany in 2011. If BMW South Africa wins approval, South African
production would probably start in 2012. Reithofer said the
preference was for three plants - two in Germany and one in South
Africa - to meet all export demand. BMW's Rosslyn plant builds
53,000 vehicles a year, 80% of which are exported. The U.S. is the
main destination due to the Africa Growth and Opportunity Act
(AGOA), which allows South African cars to land there duty-free. A
positive BMW decision would be a major boost for the APDP at a time
when industry representatives have asserted that the DTI goal to
build 1.2 million vehicles annually by 2020 is "visionary but
probably unrealistic". SA automobile and automobile parts exports
were over $1 billion during the first six months of 2008.
(Financial Mail, September 12, 2008)

Eskom Walks Timing and Funding Tightrope
as Nuclear Decision Nears

7. (U) State-owned power utility Eskom is said to be on the cusp of
making a decision on what would be its largest-ever single
investment, the development of the Nuclear-1 project , but serious
questions are being raised about funding and timing of the project.
Concerns regarding growing international financial-market turmoil,
the current overheated nature of the supply sector, and recent
domestic political turmoil could delay the project. The
power-stretched, cash-stressed utility is currently evaluating bids
for the proposed nuclear power station from two pressure water
reactor (PWR) vendors, one from the so-called EPR Consortium, led by
Areva of France, and another from the N-Powerment Consortium led by
Toshiba's Westinghouse, of the U.S. Eskom is keen to pursue a
nuclear option as a way of diversifying its carbon-emission-heavy
coal base. It has indicated that up to 50% of a 40,000 MW capacity
expansion between now and 2025 would be based primarily on PWR
technology. However, the funding of Nuclear-1, and any subsequent
'fleet plan', will be challenging. No details have emerged about
the precise capital requirement for the initial 3,000 MW, but
Qthe precise capital requirement for the initial 3,000 MW, but
figures of up to R150 billion ($20 billion) have been mooted.
Eskom's strained financial position causes such a hefty nuclear
price tag to pose a serious dilemma for a utility that has already
hinted at a funding gap for its five-year R343 billion ($50 billion)
capital program, which would only include initial nuclear-related
capex. Adding to the quandary is the fact that Eskom is going to
have to approach the foreign and domestic capital markets in the
midst of what is arguably the globe's biggest financial crisis since
World War II. Further, Eskom has to do this against the backdrop of
having been downgraded by Moody's and Standard & Poor's, with
further downgrades possible from Fitch Ratings, which has not yet
pronounced on Eskom's rating despite announcing negative outlooks
earlier in the year. Eskom could need to raise as much as R90
billion ($ 11 billion) offshore, to accelerate the development of
some 17,000 MW of new capacity by 2017, despite a plan to maximize
local borrowings. In addition, it will have to begin approaching
the capital markets before the year is out and following the recent
resignation of its Financial Director Bongani Nqwababa. Industry
observers note that it will still be important to make a timely
decision to gain a spot in the production queue with either
Westinghouse or Areva. (Engineering News and Business Day,
September 18-22, 2008)

Eskom Considers Other Power Stations
and Renewable Energy

PRETORIA 00002136 004.2 OF 006


8. (U) State-owned power utility Eskom said it was "about to start"
with environmental impact assessments for "possible further
coal-fired power stations" with up to 5,400 MW capacity in the
Waterburg and Vaal areas in the Limpopo and Northern Cape Provinces.
Construction of the 4,788 MW Medupi coal-fired power plant in
Limpopo and the 4,818 MW Kusile plant in Mpumalanga Province are
already underway. Eskom's Tony Stott said Eskom required additional
base load capacity beyond the two plants already under construction.
He said it was premature to indentify the exact size of new power
stations yet to complete pre-feasibility studies. Eskom is also
considering a concentrated solar power (CSP) plant or solar thermal
plant at Upington in the Northern Cape. Eskom Corporate Services
Head Steve Lennon said Eskom supported finding competitive
commercial solutions involving renewable energy. Department of
Minerals and Energy (DME) Chief Nuclear Director Tseliso Maqubela
said the energy-pressed status quo did not mean South Africa would
go nuclear or bust. He admitted that Eskom and authorities may not
have paid enough attention to renewable energy. (Mail and Guardian
and Business Day, September 19, 25, 2008)

PetroSA's Coega Refinery May Treat
Venezuelan Heavy Crude
9. (U) PetroSA Vice President of New Ventures Jorn Falbe said last
week that PetroSA's proposed $11 billion Coega oil refinery project
was the last opportunity for SA to build a refinery that would
concentrate on handling heavy crude supplies from the Atlantic
region to maximize economic returns. Such a refinery would source
its crude from Venezuela, Brazil and Angola, reducing SA's
traditional reliance on light sweet crude from the Middle East.
This statement follows Venezuelan President Chavez recent visit to
SA on September 2-3, which sparked renewed interest in the project.
Chavez is believed to have an interest in the project as a means of
both increasing the market for Venezuelan heavy crude and reducing
Venezuela's dependence on the U.S. market for the same crude. Falbe
said that, contrary to perceptions, the refinery would not be
reliant on oil supplies promised by Chavez during his visit, since
it could also count on potential supplies from Brazil and Angola,
which have similar heavy crude deposits. A mission from SA will
visit Venezuela during the week of September 22 to look into the
possibilities of crude oil exploration (most probably in the Orinoco
Belt) while a Venezuelan team will visit SA during the same period
to look into the details of the proposed refinery and the use of
bulk state-owned storage facilities at Saldanha Bay on the west

10. (U) Falbe said the next six months would be critical for the
refinery project as it moves into the front-end engineer-ing and
design (FEED) phase. HSBC has been appointed as a financial advisor
for the project and the pre-feasibility study has been completed by
the KBR global engineering, construction and services company. The
next step will be to select and engineering partner to complete the
Qnext step will be to select and engineering partner to complete the
FEED study. PetroSA began with 30 potential partners and has
reduced this number to four unidentified "global players". A final
decision on the project will be made after the completion of the
FEED study. Falbe said PetroSA found itself in the same position
that state power company Eskom did a few years ago when the SAG
declined to commit to major investments in the electric power
sector. The implication is that if the SAG does not finance the
project, SA will suffer refined product shortages or have to import
these [products. Falbe said that the refinery would be
strategically placed to serve the rapidly growing Chinese and Indian
markets and that the opportunity to build the refinery was "now or
never". Minister for Public Enterprises Alec Erwin was reportedly
committed to drive this refinery project forward, but he submitted
his resignation on September 23, following the unexpected
resignation of President Mbeki on September 20. (Business Day,
September 15, 2008)

Political Change Could
Deter Telkom Plans

11. (U) State-controlled ICT Company Telkom is preparing for the
expected shedding of its 50% stake in Vodacom by crafting plans to

PRETORIA 00002136 005.2 OF 006

offer mobile services of its own. By the end of the month, the
fixed-line phone company will be rolling out a wireless network
promising high-speed internet access and the ability to make voice
calls using mobile phones. Telkom needs to devise a new mobile
strategy because its partial-ownership of Vodacom has never
translated into a successful working partnership. Telkom is now
negotiating to sell 12.5% to Vodacom's other owner, UK-based
Vodafone, for R18.75 billion ($2.3 billion). Telkom will also
unbundle the remaining 37.5% stake to Telkom shareholders. The flaw
in that plan is that it leaves Telkom without a mobile partner when
clients are demanding a combination of fixed and mobile services.
However, one source believes the change of power sweeping through
the African National Congress (ANC) will scupper Telkom's plan to
sell the Vodacom shares to Vodafone. That is unlikely to happen, he
believes, as the state would struggle to justify selling the control
of such a valuable asset to a foreign entity. Whether the
government agrees to sell Vodacom or not, the ongoing changes in the
government could stall any decisions for several more weeks, the
source says. "I don't see Telkom coming up with something magical,"
he said. "Unless Telkom can say 'this is our new mobile strategy',
I see no logical explanation to sell Vodacom. It doesn't make sense
for South Africa to sell that asset to a UK company." The
counter-argument is that Telkom and Vodacom have never worked well
together. Telkom CEO Reuben September recently said the SAG and
Vodafone's dual ownership of Vodacom was bedeviling all three
parties, and was not helping Telkom to grow its business. (Business
Day, September 25, 2008)

SAG to Appeal Court Ruling and Pursue
"Managed Liberalization"

12. (U) Department of Communications (DOC) Minister Dr. Ivy
Matsepe-Casaburri announced that she would appeal the Pretoria High
Court's August judgment, which ruled that ICT service provider
Altech had the right to convert its existing value-added network
service (VANS) license into an individual-electronic communications
network service (I-ECNS) license. The ruling gave Altech and other
VANS the right to develop and operate their own communications
network, previously the preserve of large industry players such as
Telkom, Neotel, Vodacom, and MTN. However, Matsepe-Casaburri
asserted that the government's "managed liberalization" policy would
be seriously undermined if VANS licensees were allowed to obtain
I-ECNS licenses under the current license conversion process. DOC
will issue a policy directive to the Independent Communication
Authority of South Africa (ICASA) empowering ICASA to implement an
invitation-only application process for a number of new I-ECNS
licensees in accordance with the managed-liberalization policy. The
DOC is also expected to expedite an amendment to the Electronic
Communications Act to remove any ambiguity around managed
liberalization, and to clarify that VANS licensees were not entitled
to I-ECNS licenses under the license conversion process. Analysts
said the DOC decision to appeal the court ruling granting VANS the
Qsaid the DOC decision to appeal the court ruling granting VANS the
right to self-provide is a major blow to the industry in South
Africa. "If this appeal is upheld, it will be a sore blow for ICT
competition in South Africa, which has long suffered under stifling
legislation," said Huge Group CEO Anton Potgieter. He added that
the policy of managed liberalization had had limited success so far,
and argued that there was considerable merit in the market being
allowed to take the lead in addressing the high-cost and limited
service access inherent in the South African ICT industry.
(Engineering News and Department of Communications Press Release,
September 19-22, 2008)

Trump Enters SA Market

13. (U) The Trump brand of hotels and residential developments is
expected to enter the South African market through a 10-year deal
with local property group Devland. The joint-venture deal covers
leisure, golf, and "condo-hotel" developments in South Africa and
Mauritius. It is expected to create "saleable" real estate worth
about R5 billion ($633 million) in the first three years. Devlan
Director Neill Bernstein said "sleepy" South Africa would benefit
from global creative thinkers, who could help leverage the country's
property treasures. Donald Trump Jr. has been touring various
projects in Gauteng and Western Cape to assess new possibilities.

PRETORIA 00002136 006.2 OF 006

Bernstein said the partnership with the Trump group had several
projects in the pipeline, including eight in the Western Cape area.
Trump Jr. said it was important for the Trump group to secure its
branding in South Africa, which related to quality and luxury. The
South African products would be marketed globally, but it was
expected that 70% of the investors would be local. (Business Day,
September 23, 2008)

SA and Brazil to Improve Air Connections

14. (U) Brazilian airline TAM is expected to announce service to
South Africa by the end of 2009, following the completion of an
improved bilateral agreement. The agreement grants both South
African and Brazilian airlines 14 frequencies per week between the
two countries in 2008, increasing to 21 in 2009, and 28 by 2010.
South African Department of Transport Air Transport Director Vuwani
Ndwamato said bilateral negotiations last month improved air
capacity between the two countries and lifted other traffic rights
restrictions. "We have agreed on fifth freedom rights for airlines
from both countries to four unnamed points, but this is restricted,
in South Africa's case, to destinations outside South America, and,
in Brazil's case, to destinations outside Africa," explained
Ndwamato. This means both Brazilian and South African airlines
would be able to pick up and drop off passengers in South Africa or
Brazil respectively and travel on to destinations outside of Africa
or South America. (Travel Hub, September 25, 2008)

Nationwide to Enter Full Liquidation

15. (U) Nationwide's liquidator Hannes Muller has confirmed that
attempts to save the airline have been abandoned. Nationwide had
halted service without warning in April due to soaring oil prices
and the collapse of a black economic empowerment (BEE) deal.
Nationwide's troubles began when an engine fell off one of its
Boeing-737 on take-off in November 2007. It was cleared of fault by
a Civil Aviation Authority (CAA) audit, but Nationwide was grounded
at the start of the 2007 Christmas holiday season because the CAA
was dissatisfied with its record-keeping on the origin of
components. Nationwide was provisionally liquidated at the end of
April, and months of speculation followed about potential buyers and
reports that it would resurface as a low-cost domestic carrier. The
airline will now go into full liquidation. (Travel Hub, September
25, 2008)


© Scoop Media

World Headlines


UN: “COVID-19 Is Not Over”, Tedros Warns World Health Assembly

The head of the World Health Organization (WHO) told global health Ministers on Sunday that although reported COVID-19 cases and deaths have declined significantly, it is not time to lower the guard... More>>

UN: Bachelet Calls On Mexico To Step Up Efforts As Tragic Milestone Reached Of More Than 100,000 Disappearances

UN High Commissioner for Human Rights Michelle Bachelet on Tuesday called on the Mexican authorities to step up efforts to ensure truth and justice for victims of disappearances, who now number more than 100,000, according to official data... More>>

ADC: Statement On The Assassination Of Shireen Abu Akleh

Early this morning in Jenin, Occupied Palestine, revered Palestinian voice Shireen Abu Akleh, a Palestinian American journalist for Al Jazeera, was assassinated by Israeli Occupation Forces snipers...

Access Now: Elon Musk’s Twitter Buyout Must Not Come At The Expense Of Human Rights

Following today’s announcement that Elon Musk will acquire complete ownership of Twitter in a cash sale of around 44 billion USD, pending shareholder approval, Access Now urges Twitter’s Board, employees, and shareholders... More>>

UN: Biodiversity And Ecosystem Protection Highlighted On Mother Earth Day

Marking International Mother Earth Day, UN General Assembly President Abdulla Shahid urged on Friday, for collective action to safeguard biodiversity and protect ecosystems... More>>

Ukraine: Hundreds More Reach Safety After Fleeing Besieged Mariupol
In Ukraine, humanitarians said on Wednesday that hundreds of people have managed to reach safety after fleeing Mariupol, where there’s also been condemnation for the killing of Lithuanian filmmaker Mantas Kvedaravicius... More>>