VZCZCXRO3592
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #0771/01 0611512
ZNR UUUUU ZZH
R 021512Z MAR 07
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 8495
RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHJO/AMCONSUL JOHANNESBURG 6298
RUEHTN/AMCONSUL CAPE TOWN 4004
RUEHDU/AMCONSUL DURBAN 8618

UNCLAS SECTION 01 OF 03 PRETORIA 000771 
 
SIPDIS 
 
DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR OAISA/RALYEA/CUSHMAN 
USTR FOR COLEMAN 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
PGOV, SF 
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER FEBRUARY 9, 
2007 ISSUE 
 
 
PRETORIA 00000771  001.2 OF 003 
 
 
¶1. (U) Summary.  This is Volume 7, issue 09 of U.S. Embassy 
Pretoria's South Africa Economic News weekly newsletter. 
 
Topics of this week's newsletter are: 
- Ambassador Opens BEE Conference 
- Pace of Growth Jumps to Fastest in Two Years 
- Weather Affects Expected Corn Harvest 
- South Africa's U.S. Exports Up 28% 
- Super Tax Proposed for Resources Sector 
- Eskom Expects to Make Nuclear Power Plant Decision in March 
End Summary. 
 
 
Ambassador Opens BEE Conference 
------------------------------- 
¶2. (U) Ambassador Eric Bost opened an American Chamber of Conference 
of South Africa workshop on Black Economic Empowerment on March 1. 
Over 200 companies and chambers attended the event.  The Ambassador 
stressed the fact that American companies already understand the 
need for diversity and responsible corporate behavior, and noted 
that AmCham members employ 50,000 workers in South Africa and spend 
almost $90 million per year on corporate social investment.  The 
Ambassador stressed that American companies interested in long-term 
success in South Africa must embrace BEE:  "BEE not only gives black 
South Africans opportunities," he said, "but also creates new 
opportunities and markets for American companies."  He cautioned 
that BEE must remain flexible and sensitive to the practical needs 
of companies.  The Ambassador closed his remarks by stressing that 
President Bush regards expanded bilateral business ties as a key 
part of American policy in South Africa. 
¶3. (U) Department of Trade and Industry Deputy Director General 
Lionel October delivered the keynote address.  October noted that 
the old debate about whether BEE would hamper economic growth has 
been overtaken by events:  South Africa's economy, he stressed, has 
grown at unprecedented rates at exactly the moment when BEE was 
being formulated and implemented.  "There is no contradiction 
between BEE and growth," he told the business audience.  October 
also made the same point about Bee and FDI.  October said that the 
underlying principle of the new BEE Codes is to broaden the base of 
BEE beneficiaries to include workers, small businesses and 
communities.  "BEE is not just about putting equity in black hands," 
he said.  He defended the decision to impose BEE rules on companies, 
claiming it would have been impossible to leave black empowerment to 
the market.  He stressed, however, that BEE must be realistic and 
financially sustainable. 
 
Pace of Growth Jumps to Fastest in Two Years 
-------------------------------------------- 
 
¶4. (U) Economic growth accelerated to its fastest pace in more than 
two years in the fourth quarter of last year, far above market 
expectation.  Gross Domestic Product (GDP) increased by 5.6% on a 
seasonally adjusted and annualized rate in the fourth quarter of 
2006, up from the third quarter's revised growth of 4.5%.  A 
Bloomberg survey of economists had forecast growth of 4.8% for the 
fourth quarter.  Growth in the last three months of 2006 was the 
fastest since the third quarter of 2004, when it was at 7.2%. The 
main contributors to higher growth in the fourth quarter were the 
manufacturing sector, which contributed 1.4 percentage points to 
growth, and the finance, real estate and business services sector, 
which added one percentage point.  These two sectors are the largest 
and second-largest sectors in the economy respectively, and together 
account for about 36% of GDP.  The agricultural sector contracted by 
8.4% as a result of low harvests in the fourth quarter.  Continued 
contraction in the agricultural sector remains a drag on future 
growth. 
 
¶5. (U) For 2006 as a whole, the economy grew at 5%, almost as high 
as 2005's rate of 5.1%.  Growth is expected to slow down in 2007 as 
last year's interest rate hikes begin to affect consumer demand and 
the agricultural sector contraction, but increased investment by 
government, parastatals and the private sector should offset the 
slowdown to some extent.  Overall, growth prospects for the economy 
remain favorable, and there are encouraging signs that the sources 
of growth are becoming more balanced.  Analysts pointed out that the 
healthy rise in mining and manufacturing production in the final 
quarter of last year suggests that the weaker rand is doing good 
work in stimulating supply-side activity, while higher interest 
rates are having a modest dampening impact on consumer demand. 
 
PRETORIA 00000771  002.2 OF 003 
 
 
Analysts noted that, assuming that planned infrastructure spending 
takes place and benefit the broader economy, SA is on track to reach 
the government's 6% GDP growth objective by 2010. (Business Day, 
February 28, 2007) 
 
Weather Affects Expected Corn Harvest 
------------------------------------- 
 
¶6. (U) South Africa's commercial corn farmers planted about 2.6 
million hectares of corn in 2006, which under normal conditions 
would be expected to yield at least 9.75 million tons when harvested 
by mid-2007.  Although the rainfall season started late, November 
and December rainfall was good.  Since January, rainfall has dropped 
dramatically while temperatures have increased.  The prolonged hot 
and dry spell led to an official forecast on February 27 of 7.75 
million tons, a drop of about 2 million tons from initial estimates, 
implying a loss to farmers of about R3.5 billion ($500 million) at 
current high prices.  The 7.75-million-ton estimate assumes normal 
weather for the rest of the season and could certainly decline if 
the drought continues and time for crop recovery runs out.  The 
modestly good news is that a 7.75 million ton crop is still a 17% 
increase on the 6.6 million tons produced in the previous season 
when farmers cut back the area planted in an effort to balance 
supply and demand.  South Africans normally consume about 8 million 
tons of corn for human and animal feed use, so the current crop 
estimate would roughly satisfy domestic food and feed demand. 
Imports of yellow corn from Argentina are common, especially for 
feed use.  (Foreign Agricultural Service, February 27, 2007) 
 
South Africa's U.S. Exports Up 28% 
---------------------------------- 
 
¶7. (U) U.S. Customs has just released 2006 trade data.  South 
African exporters to the U.S. had a banner year, with total exports 
up 27.9% (in contrast to 10.9% total growth in U.S. imports).  More 
important than the headline number, however, is the fact that 
processed/manufactured goods generally beat the trend: autos up 
70.3%; iron and steel up 41.4%; and, furniture up 43.6%.  To 
demonstrate the trend toward increasing value-added manufacturing in 
South Africa, exports of paper increased 594% while exports of wood 
pulp declined by 26.1%.  In the sensitive area of textiles, South 
African exports declined 1.9%.  U.S. exports to South Africa 
increased by 14.6%; at almost the same level as the U.S. worldwide 
export increase of 14.5%.  U.S. sales of commodity products used in 
general infrastructure are growing the fastest: iron and steel, up 
213%; cement, up 384%; and fertilizer, up 474.5%.  U.S. exports of 
machinery, electrical machinery and aircraft were also up strongly 
at 14.2%, 18.8% and 27.0%, respectively.  The only poorly performing 
categories of U.S. exports were autos, down 16%; wood, down 9%; and 
cereals, down 65%.  The bilateral trade imbalance between the United 
States and South Africa increased by 54.8%, as South Africa's trade 
surplus increased to $3.1 billion.  South Africa's bilateral trade 
surplus with the U.S. equals about 1.1% of South Africa's GDP and it 
helps to balance out South Africa's large multilateral trade 
deficit. 
 
Super Tax Proposed for Resources Sector 
--------------------------------------- 
 
¶8. (U) South Africa's two synthetic fuel producers, privately-owned 
Sasol (coal-to-liquids) and state-owned PetroSA (gas-to-liquids), 
have been under government and public scrutiny ever since the rapid 
rise in crude oil prices began to be felt in the economy and 
peoples' pockets.  Both Sasol and PetroSA were built with public 
funds, and, although Sasol was privatized in 1979, it enjoyed the 
protection of the SAG against low crude prices until the late 1990s. 
 In July 2006, when crude prices were well above $70 per barrel, 
both companies enjoyed the benefits of high international oil prices 
while using South Africa's relatively cheap coal, gas and 
electricity inputs.  The companies made huge profits and few 
material benefits were passed on to consumers.  At that point, the 
Minister of Finance proposed an investigation into windfall taxes on 
'excessive' profits earned by the synfuels industry and appointed a 
Task Team to undertake such an investigation.  The Task Team report 
produced on February 23 concluded that a windfall/super tax could be 
applied to both the synthetic fuel and the minerals industry.  The 
report suggests that such a tax could kick in when crude prices 
exceeded about $45 to $55 per barrel and that, similarly, a price 
level could be set for each mineral commodity that would trigger a 
 
PRETORIA 00000771  003.2 OF 003 
 
 
progressively larger tax take.  The report also recommended 
credits/tax breaks for new investment and for prices below a set 
level (a floor price below which subsidies would apply).  The 
Minister has said that the synfuel industry will be consulted before 
a decision is made.  The key will be to apply a windfall 
tax/investment credit that will not discourage the industry from 
investing in badly needed additional synfuel capacity in South 
Africa. 
 
Eskom Expects to Make Nuclear Power Plant Decision in March 
--------------------------------------------- -------- 
 
¶9. (U)  South African parastatal power utility Eskom is expected to 
announce plans for construction of a second nuclear power station 
following its March 2007 board meeting.  The most likely location is 
adjacent to the country's sole commercial reactor in Koeberg near 
Cape Town.  Eskom is believed to have already chosen a Pressurized 
Water Reactor (PWR) design which narrows the field of potential 
bidders.  Westinghouse/Toshiba and French parastatal Areva are 
expected to be the main contenders.  Consortiums from Russia and 
Korea have also expressed interest in the project.  The selection 
process is expected to take another year with an award to be made in 
March 2008. Following the board meeting, Eskom may also announce 
plans for construction of smaller Pebble Bed Modular Reactors as 
well as plans for additional coal-generation plants.  The country 
has been suffering from rolling blackouts and additional generation 
capacity is desperately needed.  (Engineering News, February 16, 
2007) 
 
BOST