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UNCLAS SECTION 01 OF 05 PRETORIA 000162 
 
SIPDIS 
 
DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR TRINA RAND 
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 
JANUARY 25, 2008 ISSUE 
 
PRETORIA 00000162  001.2 OF 005 
 
 
¶1. (U) Summary.  This is Volume 8, issue 4 of U.S. 
Embassy Pretoria's South Africa Economic News Weekly 
Newsletter. 
 
Topics of this week's newsletter are: 
- Turmoil in Markets Threatens Growth 
- SAG Inflation Targeting Policy Questioned 
- Fixed-Investment Outlook Strong for 2008 
- Saudi-based Group to Invest in Telkom SA 
- Freight Transport Rate Hikes Outpace Inflation 
- BHP Billiton's Oil Search Stymied 
- China's Gold Output Surpasses South Africa 
- Mining Industry Considers Backup Power Supplies 
- Power Shortages Impact Mining Expansion 
- Civil Aviation Authority Revises Recruitment 
  Strategy 
End Summary. 
 
----------------------------------- 
Turmoil in Markets Threatens Growth 
----------------------------------- 
 
¶2. (U) Turmoil in currency and equities markets has 
complicated the job of the South African Reserve Bank 
when it considers next week whether to change the 
interest rate policy.  While a slide in the Rand is 
set to push inflation up, a rout on the Johannesburg 
Stock Exchange and a deepening power crisis threaten 
to curb economic growth.  "There are more reasons 
today for the Reserve Bank to consider leaving 
interest rates on hold, although there has been 
nothing but bad news in terms of inflation," said ABSA 
Capital chief economist Jeff Gable, adding, "The 
fundamental question for the Bank now is how to 
balance a miserable inflation message with growing 
signs of a meaningful slowing in consumer demand and 
concern over the broader economy."  The Rand had 
plunged more than 8% in the past week alone, an 
ominous sign of inflation to come, but recovered 
partially after the U.S. Federal Reserve cut interest 
rates by 75- basis-points on January 22.   (Business 
Day, January 23, 2008) 
 
----------------------------------------- 
SAG Inflation Targeting Policy Questioned 
----------------------------------------- 
 
¶3. (U) SACP Deputy General Secretary and newly elected 
National Working Committee (NWC) member Jeremy Cronin 
stated that inflation targeting, a key government 
anti-inflation policy, "is wrong".  Cronin added that 
there was a feeling in the tripartite alliance that 
South Africa should follow the example of South Korea, 
which had "manipulated" interest rates according to 
industrial policy and "strategic objectives".  Many 
analysts believe that this would be the wrong time to 
question the government's anti-inflation efforts, as 
interest rates have been above the Department of 
Treasury's 3-6% inflation targeting band for nine 
consecutive months.  It would also send the wrong 
signal to bond and equity markets, which will be 
needed to continue to finance South Africa's large and 
growing current account deficit, and would have a 
negative effect on the country's exchange rate and 
sovereign credit rating.  However, other analysts 
believe that the inflation targeting band of 3-6 
percent has caused the South African Reserve Bank to 
hike interest rates unduly in the face of inflation 
fueled by international fuel and food prices, rather 
than demand pressures.  (Business Report, January 15, 
2008) 
 
---------------------------------------- 
Fixed-Investment Outlook Strong for 2008 
---------------------------------------- 
Q---------------------------------------- 
 
¶4. (U) First National Bank Chief Economist Cees 
Bruggemans said electricity, transport, communications 
and mining are expected to be the main drivers of real 
 
PRETORIA 00000162  002.2 OF 005 
 
 
fixed-investment growth in 2008. He expected fixed- 
investment growth of 13%-16% in 2008.  Bruggemans said 
public corporations would show the fastest increases, 
but government and private business should continue to 
expand steadily as well.  He added that the fixed 
investment to gross domestic product (GDP) ratio is 
expected to top 25% by 2010.  According to the 
December 2007 South African Reserve Bank quarterly 
bulletin, real fixed-investment spending rose 16% in 
the first three quarters of 2007 and reached 21.2% of 
GDP in the third quarter.  Public corporations 
increased their real fixed investment 32% y/y in 2007. 
Bruggemans indicated that a "bulk of this effort went 
into infrastructure creation," with more than 50% of 
investment spending focused on construction, 35% on 
machinery and equipment, 10% on transport equipment 
and only 2% on nonresidential buildings.  In contrast, 
government investment growth was much slower, with 13% 
y/y fixed investment growth in 2007, but this was a 
great improvement over 2006, when a decline of 0.5% 
y/y occurred.   (Business Day, January 22, 2008) 
 
---------------------------------------- 
Saudi-based Group to Invest in Telkom SA 
---------------------------------------- 
 
¶5. (U) Saudi-based Oger Telecom plans to buy into 
South African fixed-line operator Telkom SA.  Oger CEO 
Paul Doany told reporters it will use some of the $2.6 
billion it earned from the sale of a stake in Saudi 
Telecom to invest in Telkom SA.  Oger already has a 
majority stake in unlisted Cell C, South Africa's 
third-largest mobile operator.  Doany did not specify 
the size of the offer but said about $830 million will 
be paid to shareholders as a dividend.  Telkom SA 
issued a statement stating it would consider the 
"nonbinding expression of interest" from Oger Telecom, 
along with other alternative options to enhance its 
converged fixed and mobile services.  The bid comes in 
the wake of aborted talks for Telkom SA to sell part 
of its 50% stake in Vodacom, South Africa's largest 
mobile operator, to the U.K.'s Vodafone, which already 
owns the other half.  That was cancelled when Telkom 
failed to agree a tie-up with MTN, which would have 
filled the gap created by selling its Vodacom mobile 
assets.  MTN is the largest mobile operator in sub- 
Saharan Africa.  (Business Day, January 23, 2008) 
 
--------------------------------------------- - 
Freight Transport Rate Hikes Outpace Inflation 
--------------------------------------------- - 
 
¶6. (U) Transnet Freight Rail is the latest state 
utility to announce above-inflation tariff increases. 
The new freight tariffs will take effect from April 
2008 increasing freight rail prices by 16.5%-22%.  The 
price on a consignment of 10 wagons or more will go up 
16.5% y/y, while the increase for consignments of 
fewer than 10 wagons will be 19.5% y/y.  Transnet 
Freight Rail also announced that charges on some 
routes would go up 22% y/y, irrespective of 
consignment sizes.  While the utility did not specify 
which routes, Chamber of Mining Executive Director 
Jannie de Villiers said they were likely to be those 
serving rural and agricultural areas, which means the 
cost of shipping agricultural products to market would 
Qcost of shipping agricultural products to market would 
increase significantly and push up food prices. 
Transnet Freight Rail wants to increase its market 
share from about 10% to 30% in the next five years.  A 
large chunk of the Transnet group's capital spending 
of R78 billion ($11 billion) over the next five years 
will go to upgrading rail operations.  (Business Day, 
January 18, 2008) 
 
--------------------------------- 
BHP Billiton's Oil Search Stymied 
--------------------------------- 
 
¶7. (U) BHP Billiton, the operator of two potential 
 
PRETORIA 00000162  003.2 OF 005 
 
 
petroleum-producing blocks off South Africa's west 
coast, has reached an impasse with the government over 
the conversion of its exploration leases to new-order 
mining rights.  A key obstacle is related to the 
Department of Mining and Energy's (DME) insistence 
that local courts arbitrate in disputes, rather than 
international arbitration courts as expected by 
international oil companies.  BHP Billiton's old-order 
sub-leases are believed to include "stability clauses" 
and access to international arbitration and the 
government appears to be using the conversion 
requirement to remove these rights.  Another oil 
producer, U.S.-based Pioneer Natural Resources, said 
other operators in the local petroleum exploration 
sector faced similar problems, but "Pioneer had 
reached an accommodation to make our situation work." 
Other operators have greater incentive than BHP to 
agree to the government's terms because they have 
already invested significantly in drilling.  Forest 
International, the U.S.-based operator of the Ibhubesi 
gas field off the west coast, is expected to have new- 
order production rights for its acreage issued this 
year.  A Business Report editorial opined that the 
"state's stubborn petroleum policy may need oiling." 
It noted that BHP Billiton was holding off on 
exploration apparently due to fears of uncertainty 
over royalties, as well as rights to international 
arbitration.  The editorial concludes: "Given the 
uncertain environment and the fact that South Africa's 
undersea geology is not as enticing as Angola's, it is 
perhaps not surprising that no new players have 
invested in our off-shore petroleum reserves in the 
last five years."  (Business Report, January 16, 2008) 
 
------------------------------------------ 
China's Gold Output Surpasses South Africa 
------------------------------------------ 
 
¶8. (U) China overtook South Africa as the world's 
largest gold producer in 2007, according to the Gold 
Survey 2007 from the precious metals consultancy GFMS. 
South Africa had held the accolade since 1905, but its 
output has been in steady decline since it reached a 
peak of 1,000 tons in 1970.  China's move to the top 
spot comes after strong, continued growth in recent 
years, while gold production in South Africa has 
continued to decline.  South Africa's declining 
production means it is losing out on potential foreign 
earnings and employment opportunities as the gold 
price has picked up in the past few years, touching a 
record of $914/oz this week.  Latest data from 
Statistics South Africa for the year to November 
showed South Africa's gold production fell 12.7% 
compared with the same period in 2006 because of 
safety-related mine shaft closures.  GFMS reported 
that South Africa's production for the whole of 2007 
declined 8.1% y/y to 272 tons while China's increased 
12% y/y to 276 tons. GFMS said gold production was 
affected by the increasingly difficult operating 
environment in South Africa.  Competition for 
consumables, labor and key plant items hampered 
project development.  Globally, gold production fell 
1%, but GFMS forecast it would grow about 2% in the 
first half of 2008.  GFMS estimated that gold prices 
Qfirst half of 2008.  GFMS estimated that gold prices 
could average $840/oz in the first half of 2008 and 
could be even higher in the second half.  (Business 
Day, January 18, 2008 and Mining Weekly, January 17, 
2008) 
 
--------------------------------------------- -- 
Mining Industry Considers Backup Power Supplies 
--------------------------------------------- -- 
 
¶9. (U) The South African mining industry has received 
assurances from Eskom for priority service during 
power shortages, but is struggling to reduce power 
consumption.  The companies are all "load-shedding" 
but there are certain activities, such as ventilation 
and transporting workers and equipment, for which 
 
PRETORIA 00000162  004.2 OF 005 
 
 
there is limited room for further reductions due to 
safety concerns.  Although producers have not yet had 
to incur any additional costs for backup power, some 
are considering options for backup supplies. However, 
one producer, Simmer & Jack, said the cost of 
traditional backup options was prohibitive.  For 
example, operating standby diesel generators costs 
about 6 to 10 times as much as power supplied by 
Eskom, which is why they are used only in emergencies. 
Harmony Gold Mining, which uses about 460 megavolt 
amperes (MVA) at peak periods, said it was in 
partnership with another company to pursue an Eskom 
co-generation project. This would entail building 
seven generating stations at Harmony's operations with 
a total capacity of 300 MVA.  Gold Fields was buying 
additional emergency capacity to supply its existing 
backup, it said.  AngloGold Ashanti installed backup 
power units 20 years ago, which could evacuate a peak 
shift of underground workers.  (Business Day, January 
22, 2008) 
 
--------------------------------------- 
Power Shortages Impact Mining Expansion 
--------------------------------------- 
 
¶10. (U) South Africa's main gold and platinum mines 
have secured enough power to keep their expansion 
projects moving for the next two or three years, but 
beyond 2010 they can not be certain of their 
electricity supplies.  Gold Fields, Harmony Gold 
Mining and Simmer & Jack are extending existing 
operations or reopening mines where the electricity 
infrastructure is already in place, so they are not 
shelving any announced capital projects.  However, 
there is concern that "Eskom cannot provide quotations 
for the increased capacity required beyond 2010 until 
they finalize their policy on allocating new capacity 
in this period of shortage."  A Simmer & Jack 
spokeswoman said its projects at Buffelsfontein, 
Hartbeestfontein and Ezulwini were in areas that 
historically had been very large consumers of 
electricity.  An AngloGold Ashanti spokeswoman 
reported: "The big projects that require additional 
power are only scheduled to come into full production 
after 2010. This is not due to the energy situation, 
but they have long lead times for sinking operations." 
A BHP Billiton spokeswoman said the group could not 
expand its Hillside and Mozal smelters unless it could 
secure enough power at internationally competitive 
prices.  Anglo Platinum said its current expansion 
projects will increase its electricity consumption by 
50% by 2013, but did not say it would defer any of its 
capital projects.  Platinum producer Lonmin announced 
that electricity problems would not alter its 
expansion plans, including the development of Akanani 
after 2012.  (Business Day, January 22, 2008) 
 
--------------------------------------------- -------- 
Civil Aviation Authority Revises Recruitment Strategy 
--------------------------------------------- -------- 
 
¶11. (U) Civil Aviation Authority (CAA) 
CEO/Commissioner Colin Jordaan told the press that CAA 
is revising its strategy to recruit additional 
aviation inspectors.  Jordaan originally hoped to 
recruit about 40 inspectors from a group of 
experienced pilots that South African Airlines (SAA) 
Qexperienced pilots that South African Airlines (SAA) 
was planning to retrench.  However, many of these SAA 
pilots have received and accepted offers from 
expanding airlines in the Middle East.  To respond to 
short-term needs, Jordaan is planning instead on 
recruiting experienced pilots who are close to 
retirement from other South African local airlines, 
including Nationwide and British Airways/Comair. 
Jordaan expressed hope that a new South African 
regulation that reduces the age at which student 
licenses are granted from 18 to 16 years will increase 
the pool of trained pilots in the long-term.  He 
reported that similar reductions have been in place in 
 
PRETORIA 00000162  005.2 OF 005 
 
 
many other countries and it is seen to be a safe 
measure.  Both SAA and British Airways/Comair offer 
training programs for a limited number of student 
pilots.  (Business Report, January 18, 2008) 
 
BOST