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Cablegate: South Africa Economic News Weekly Newsletter December 5,

DE RUEHSA #2648/01 3401333
R 051333Z DEC 08




E.O. 12958: N/A
2008 ISSUE

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1. (U) Summary. This is Volume 8, issue 49 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:

- Concern as Chinese Clothing Quotas Expire
- Tax Reforms Help South Africa's Rankings in a Global
- Factories Hit Historic Low as Recession Bites
- Parliament Passes Competition Amendment Act, Consumer
Protection and Companies Bills
- SACU Meets to Discuss EPA
- Freight Transport Threatened By Looming Strikes
- World Cup Fuel Demands
- GM South Africa Believes Low-Level of Tariffs under ADPD
Will Threaten Industry
- COSATU Affiliates Urged to "Invest in ESKOM"
- Xstrata-Merafe and Other Ferrochrome Producers Close More
- EIA for the Wild Coast Toll Road Released for Comment

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End Summary.

Concern as Chinese Clothing Quotas Expire
2. (U) The quotas on Chinese clothing and textile imports are due
to expire at the end of the month, but the industry is gripped by
uncertainty on whether an 11th-hour extension will be made through a
bilateral agreement with the Chinese government. A two-year
bilateral agreement that came into effect in January 2007 is the
basis of the current quota scheme. If the term of the agreement is
not extended, the quotas will expire unless one of the stakeholders
makes a formal application to the International Trade Administration
Commission (ITAC). South African Clothing and Textile Workers'
Union General Secretary Ebrahim Patel said the union would strongly
support an extension because the quotas have been "very helpful" and
saved thousands of jobs. He warned it would be "an absolute
disaster" if there were a huge surge in cheap Chinese clothing and
textile imports early in 2009. He estimated that cheap Chinese
imports had resulted in the loss of more than 80,000 clothing jobs
and more than 20,000 textile jobs before the quotas were introduced.
Patel conceded that China's need to increase its exports in the
context of an economic slowdown might make it reluctant to extend
the quota scheme. However, he said Chinese clothing exports to
South Africa were only 0.5% of its total global exports, whereas
they made up about 62% of South Africa's total clothing imports.
(Business Day, December 4, 2008)
Tax Reforms Help South Africa's Rankings
in a Global Study
3. (U) South Africa is ranked 23rd out of 181 economies in terms of
ease of paying taxes, reports an international study released by the
World Bank. The World Bank's Doing Business 2009 annual report
rates 181 economies on key business regulations and reforms. South
Africa's ranking is a "significant improvement," remarked
PriceWaterhouseCoopers Tax Director Charles de Wet, given that South
Africa moved up from a ranking of 61st in the World Bank's Paying
Taxes 2008 report and is now in the top quartile of all economies.
South Africa's high ranking is attributable to steps taken by the
National Treasury and the South African Revenue Service (SARS) to
implement electronic filing for taxpayers. International Finance
Qimplement electronic filing for taxpayers. International Finance
Corporation (IFC) Doing Business Team official Caroline Otonglo
observed that South Africa has also abolished two taxes for
businesses, regional services levies and the retirement fund tax.
Otonglo also noted that the time taken for companies to be tax
compliant has been reduced and "For businesses it's not just the tax
rates that matter. The administrative processes also count." South
Africa was also ranked as the third easiest country in which to
obtain credit. The study measured legal rights of borrowers and
lenders, including the scope and quality of credit information
systems. South Africa was ranked ninth for its laws in protecting
investors. The country's laws were cited as an inspiration for
other economies. South Africa's worst ranking was 147th out of 181
in the "trading across borders" category. The number of days
required for imports and exports far exceeded those for the Asia or
South America regions. (Business Day, November 28 and December 2,

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Factories Hit Historic Low as Recession Bites
4. (U) South Africa's factories have put in their worst performance
in nine years. The global recession and waning consumer demand have
hammered the manufacturing sector, which accounts for 16% of South
Africa's GDP and 14% of its formal jobs. Manufacturing output in
South Africa shrank 6.9% in the third quarter of this year, its
steepest fall in 17 years. The Investec purchasing managers' index
(PMI), an economic indicator of factory production, plunged from
46.4 in October to 39.5 in November. Investec Asset Management
Portfolio Manager Mokgatla Madisha noted "the manufacturing sector
continues to operate under severe pressure." The dismal PMI
readings for South Africa and its main trade partners were seen as
likely to put pressure on the South African Reserve Bank (SARB) to
cut interest rates at its policy meeting next week to help stimulate
the flagging economy. Standard Chartered's Regional Research
Director for Africa Razia Khan commented, "There is no argument now
to justify unchanged monetary policy in South Africa, given the
extent to which the world has changed ... these are not normal
times. When you factor in the worst global slowdown seen in decades
... there is less reason for the [SARB] to keep rates on hold now."
(Business Day, December 2, 2008)
Parliament Passes Competition Amendment Act,
Consumer Protection and Companies Bills
5. (U) Parliament passed the Competition Amendment Bill, the
Companies Bill, and the Consumer Protection Bill in a legislative
flurry during the last week of November. The Competition Amendment
Bill introduced criminal sanctions against individuals found guilty
of causing a firm to engage in price fixing, output restriction,
market allocation, or collusive tendering. An offending individual
may face up to ten years in prison or be fined R500,000 ($50,000),
or both. Minister of Trade and Investment Mandisi Mpahlwa stated,
"This severe penalty serves as a signal that cartel activities will
not be tolerated, and those involved in this harmful practice will
be severely punished." The Consumer Protection Bill sought to
promote an economic environment that supports a culture of consumer
rights and responsibilities. The Consumer Protection Bill provides
for a controversial system of product liability where any producer,
distributor, or supplier would be held liable for any damage in the
form of death, injury, loss, or damage to property and economic loss
to the consumer or a third party. A National Consumer Commission
would be established to investigate consumer complaints, while the
National Consumer Tribunal would adjudicate over violations of the
Consumer Protection Act. The courts would also adjudicate on all
contractual matters, and would confirm consent orders concluded with
suppliers. Minister Mpahlwa commented that the bill encourages
consumer activism and alternative dispute resolution. The Companies
Bill was aimed at overhauling the current Companies Act. Under the
QBill was aimed at overhauling the current Companies Act. Under the
new Companies Bill, all companies would be required to prepare
annual financial statements. Business shareholders would also have
to appoint an audit committee as a subcommittee of the board of
directors, and demand for a meeting would have to be supported by
10% of the voting rights. The bills will not become effective until
President Kgalema Motlanthe signs them. The Department of Trade and
Industry expects that all three pieces of legislation would come
into force by mid-2010. (Engineering News, November 27, 2008)
SACU Meets to Discuss EPA
6. (U) The Southern African Customs Union (SACU) plans to meet with
the European Union (EU) in Namibia on December 6 to discuss the
SACU-EU economic partnership agreement (EPA). The EU is pushing for
the agreement to be signed by January. South African trade
officials believe that the draft EPA does not benefit South Africa
and that provisions in the document are at odds with some South
African government policies. Department of Trade and Industry (DTI)
Director General Tshediso Matona said, "The other countries in SACU
may not see matters in the same way, and it is understandable
because our economy is different. South Africa is the largest
economy in the region and in the customs union. It is much more
complex and diversified." South Africa's interests will not always
coincide with the interests of other SACU members Botswana, Lesotho,
Namibia, and Swaziland, Matona observed, and it is not up to South
Africa to dictate to the other members which position to take. "Any
suggestion that we are a bully is without any foundation," he said.

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Under the trade policy signed by SACU members, no member of the
union could enter third-party agreements without all the members
being jointly informed and taking part in joint negotiations.
Matona commented, "Ideally, there should be a consensus within the
union with regard to what stance we take, not only in relation to
the EU, but also in regard to negotiations with the World Trade
Organization." He added that the EU should respect the region's
integration agenda, and should not allow its own interests to upset
or fragment the region. SACU has not decided to dissolve itself,
Matona insisted and South Africa has not considered withdrawing from
the union. (Engineering News, December 3, 2008)
--------------------------------------------- --
Freight Transport Threatened By Looming Strikes
--------------------------------------------- --
7. (U) The supply of food and clothes to retailers could grind to a
halt early next year if 60,000 road freight industry workers go on
strike. The looming industrial action in the national road freight
industry depends on the outcome of the second and final dispute
resolution meeting between unions and the Road Freight Association
over wages and employment conditions. The first meeting in November
ended in deadlock, and the last meeting is likely to take place in
the third week of January. The South African Transport and Allied
Workers' Union (SATAWU) and other unions that are part of the
National Bargaining Council for the Road Freight and Logistics
Industry declared the dispute in October. The 60,000 potential
strikers include long-distance drivers, loaders, general workers,
vehicle guards, and clerks. SATAWU National Sector Coordinator
Tabudi Ramakgolo said, "We will now proceed to a second compulsory
dispute meeting in terms of the protocol agreement. Once these
meetings have taken place and if there is still no agreement, the
unions may issue a 48-hour notice with the aim of engaging in an
industrial action." SATAWU called on the government to begin
regulating the road freight industry, because the current
self-regulation method has failed. Other issues raised by SATAWU
include companies' use of labor brokers and sub-contractors. A
strike would also affect the transportation of manufacturing parts
and other equipment since most commercial goods are transported via
road in South Africa due to lack of effective rail transport
infrastructure. (Business Times, December 2, 2008)
World Cup Fuel Demands
8. (U) Ensuring that parts of South Africa do not run out of fuel
during the 2010 FIFA World Cup requires careful management and
teamwork, cautioned Engen General Manager for International Business
Development Wayne Hartmann. He said supply concerns would persist
"until the day of the races actually happens." The Guateng
industrial heartland currently receives much of its diesel, petrol,
and jet fuel through a pipeline from refineries in Durban. But the
pipeline network is reaching its capacity, say liquid-fuels sector
experts. State-controlled freight and transport logistics group
Transnet is planning to build an R11.2 billion ($1.1 billion)
QTransnet is planning to build an R11.2 billion ($1.1 billion)
pipeline, including a 544 kilometer trunk line from Durban to
Gauteng but it is unlikely to be ready in time to help meet the
increased demand that will be sparked by the World Cup -
particularly for jet fuel. Hartmann explained that alternative
strategies could be employed to resolve the shortage. For example,
some aircraft could be refueled at the coast on their way to and
from Johannesburg. (Note: A new international airport is being
built in Durban, which could provide these services.) (Business
Times, November 24, 2008)
GM South Africa Believes Low-Level of Tariffs
Under ADPD Will Threaten Industry
9. (U) General Motors South Africa (GMSA) President Steve Koch told
the press that the low level of tariff protection against vehicle
imports was a long-term threat to South Africa's automotive
industry. Koch said import duties on vehicles were currently 29%,
which would fall to 25% by 2012 when changes to the Motor Industry
Development Program (MIDP) are implemented. Duties will remain at
this level when the new Automotive Production and Development
Program (APDP) comes into effect in 2013. But Koch emphasized that
no country with low-volume markets had duty levels below 35%. For
example, India has an annual new vehicle market of 2 million units
and a 100% duty on imported vehicles. Brazil has a 3 million unit
market and a 35% duty. Koch expects the total South African vehicle
market to decline from 614,000 units in 2007 to about 490,000 units
this year and 400,000 units in 2009. The level of support to South

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Africa's automotive industry as a percentage of revenue had declined
from 12% in 2004 to an estimated 9% in 2008, said Koch. He
anticipates it falling to 7.6% in 2012, and said the industry would
not achieve the objective of doubling vehicle production from
600,000 units this year to 1.2 million in 2012. Koch noted that the
support levels in the ADPD fell short of covering the various
insufficiencies and cost penalties confronted by original equipment
manufacturers in South Africa. "Without higher duty levels, closer
to global norms, market prices do not generate adequate returns to
support future investment," Koch explained. "As a result, GMSA does
not believe the APDP objectives (large export volumes) can be
achieved without higher completely built-up duty levels or
additional support." Koch's comments were accompanied by press
statements that GM is expected to make a decision regarding the sale
of the Hummer brand in early 2009. Hummer is GMSA's principal
export and South Africa is the only site on the continent that
produces the brand. GMSA produces 8,000 Hummers per year for the
export market, and 1,200 for the local market. These volumes would
not be large enough to qualify for ADPD support. (Business Report
and Business Day, December 3, 2008)
COSATU Affiliates Urged to "Invest in ESKOM"
10. (U) COSATU President Sdumo Dlamini has asked COSATU affiliates
to consider investing in power utility Eskom. The beleaguered state
electricity provider needs to raise at least $34 billion to
implement its capital expansion program and reduce a critical
electricity shortage. The South African Government has lent Eskom
$6 billion and COSATU hopes its affiliates can help make up the
shortfall by investing in the company. Affiliates have been asked
to invest in ESKOM instead of placing pension fund money with
brokerage houses and offshore. Dlamini argued that investing in
Eskom will ensure job creation, economic growth, and prevent further
electricity price hikes. (Business Day November 28, 2008)
Xstrata-Merafe and Other Ferrochrome
Producers Close More Furnaces
11. (U) The world's biggest producer of ferrochrome is temporarily
closing more furnaces to bring its total suspension of production to
52% of capacity. The suspensions are in response to weakening
prices. Xstrata-Merafe Chrome Venture (Xstrata) announced three
weeks ago that it would suspend six furnaces or 29% of capacity
because of "short-term demand weakness." Xstrata now says it
intends to suspend another five furnaces until market conditions
improve. Altogether it has suspended 906,000 tons of annualized
production capacity. Company officials said they will monitor
market conditions closely, and that there are no plans to retrench
any permanent staff. The Xstrata-Merafe Chrome Venture decision
follows cutback announcements by all South African producers last
month. Second-biggest ferrochrome producer Samancor Chrome plans to
shut all of its furnaces for more than two months. International
Qshut all of its furnaces for more than two months. International
Ferro Metals (IFM) said last week it will suspend production from
its ferrochrome furnaces until March. Local ferrochrome producers
may have cut back as much as 3 million tons of annual output since
the beginning of November. The cutbacks will reduce electricity
demand by 1,100 megawatts, or 3% of Eskom's capacity. IFM Managing
Director David Kovarsky estimated that the local ferrochrome
industry is using one gigawatt less power since the cutbacks. The
reduced demand on Eskom to produce electricity is the single bright
spot for South Africa, which is the world's biggest source of
ferrochrome. IFM plans to continue to supply customers from its
stock, but it will suspend new sales in places where ferrochrome
market conditions are particularly poor, like China. Hernic
Ferrochrome Operations Director Jasper Pieters commented, "It just
seems like the market is falling further ... there is no demand.
You can't sell anything." Fairfax Analyst John Meyer remarked that
orders from the stainless steel industry were likely to recover next
year as production resumes, but he does "not expect a rapid return
to 2007-08 levels, though fiscal stimulation could see some
resumption towards this level of demand. Capacity is available
within the stainless steel sector to drive demand ahead of available
ferrochrome supply if confidence and finance returns to construction
and consumer markets." (Business Day, December 2, 2008)
EIA for the Wild Coast Toll Road
Released for Comment
12. (U) Private consulting company CCA Environmental has completed

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and released for public comment an environmental impact assessment
(EIA) report for the proposed construction of an extension of the N2
freeway along the Wild Coast. The proposed 560 kilometer freeway
will be a toll road that runs from the Eastern Cape to Kwa-Zulu
Natal. The EIA highlighted the potential impact for economic
development and tourism, and considered the potential impact upon
air quality, agriculture, land use, noise, and scenery. The public
may comment on the EIA until January 9, 2009. CCA Environmental
will include the comments in its final Environmental Impact Report.
CCA Environmental conducted the EIA for the National Department of
Environmental Affairs and Tourism, the Eastern Cape Department of
Economic Development and Environmental Affairs and the
Kwa-Zulu-Natal Department of Agriculture and Environmental Affairs,
all of which would be involved in the project. (Engineering News,
December 2, 2008)

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