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UNCLAS SECTION 01 OF 07 PRETORIA 000268 
 
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 
STATE PLEASE PASS USAID 
STATE PLEASE PASS USGS 
DOE FOR T.SPERL, G.PERSON, A.BIENAWSKI, M.SCOTT, 
L.PARKER 
 
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 8, 2008 ISSUE 
 
 
PRETORIA 00000268  001.2 OF 007 
 
 
¶1. (U) Summary.  This is Volume 8, issue 6 of U.S. 
Embassy Pretoria's South Africa Economic News Weekly 
Newsletter. 
 
Topics of this week's newsletter are: 
- Sector Focus: Auto Industry 
- Car Sales Hammered By Rising Inflation, Interest 
  Rates and Debt 
- New Subsidy Program for Auto Producers 
- GM Expands SA Presence 
- Ford Increases Investment and Localization 
- Renault to Invest in New Plant 
- SA to Import Chinese Vehicles 
- Power Crisis Leads to Executive Shakeup 
- Infrastructure Problems Affect Production 
- Coega Aluminum Project Cast in Doubt 
- Power Cuts Put Rand on Rocky Road 
- Business Confidence Falls to Four-Year Low 
- SADC to Boost Air Transport 
- Vodacom Offers Free Upgraded Internet 
- DEAT Bans Abalone Diving 
End Summary. 
 
--------------------------- 
Sector Focus: Auto Industry 
--------------------------- 
 
¶2. (U) The South African auto sector makes up about 
10% of manufacturing exports.  In 2006, the industry's 
capital expenditure reached a record R6.2 billion 
($800 million).  Overall passenger vehicle sales rose, 
while import sales exceeded locally-produced vehicle 
sales for the first time in 2007.  As a result, 
analysts expect the 2007 auto industry trade deficit 
to remain at 2006 levels, at around R33 billion ($4.2 
billion).  A number of manufacturers are increasing 
investments and focusing on exports for 2008.  The 
government is offering new incentives to boost 
production and exports to decrease the auto trade 
deficit. 
 
--------------------------------------- 
Car Sales Hammered By Rising Inflation, 
Interest Rates and Debt 
--------------------------------------- 
 
¶3. (U) According to the National Association of 
Automobile Manufacturers of South Africa (NAAMSA), new 
vehicle sales decreased from 52,212 units in January 
2007 to 47,296 units in January 2008, a drop of 4,916 
units, or 9.4% y/y.  Passenger car sales increased by 
14.6% y/y to 30,483 units in January 2008, while 
medium and heavy commercial vehicle categories 
remained strong, rising 27% and 14% y/y, respectively, 
supported by strong infrastructure spending.  Nedbank 
Chief Economist Dennis Dykes said, "The latest vehicle 
sales figures show that household confidence continues 
to fade as the pressure of higher inflation, higher 
interest rates and higher debt burdens continues to 
build.  Household spending is expected to slow as the 
year progresses."  Since June 2006 the Reserve Bank 
has hiked interest rates four percentage points to 
curb inflation fuelled by rising food and fuel prices. 
The passage of the National Credit Act in - 2007 also 
made it more difficult for marginal borrowers to 
obtain credit.  (Business Day, February 5, 2008) 
 
 
PRETORIA 00000268  002.2 OF 007 
 
 
-------------------------------------- 
New Subsidy Program for Auto Producers 
-------------------------------------- 
 
¶4. (U) The South African Government's goal for the 
local auto industry is to produce 1.2 million vehicles 
a year by 2020.  This target is taking center stage in 
the drafting of a new policy to replace the current 
export-based Motor Industry Development Program 
(MIDP).  A new program is likely to subsidize vehicle 
manufacturers, which achieve annual production of 
50,000 units or more per vehicle platform.  Vehicle 
production decreased significantly in 2007, but is 
expected to pick up in 2008. The industry manufactured 
around 535,000 vehicles for local and export markets 
in 2007, down 8.9% y/y from the 587,000 units produced 
in 2006.  The projected production figure for 2008 is 
619,600 vehicles.  National Association of Automobile 
Manufacturers of South Africa Executive Manager Norman 
Lamprecht said 2007 local production most likely took 
a knock on the back of a slowdown in domestic vehicle 
sales.  A drop in export sales also dented vehicle 
production, with several companies spending 2007 
gearing up for new export programs, says Lamprecht. 
Vehicle exports reached 179,859 units in 2006, but 
eased to 171,260 in 2007.  Lamprecht expects exports 
to jump 49% y/y to more than 255,000 vehicles in 2008, 
"especially as the Toyota Corolla and Mercedes-Benz C- 
Class export programs start peaking".  (Engineering 
News, January 25, 2008) 
 
---------------------- 
GM Expands SA Presence 
---------------------- 
 
 
¶5. (U) General Motors South Africa (GMSA) will invest 
R481 million ($62 million) to upgrade its tooling and 
production facilities in 2008.  In addition, 
construction is under way at a new vehicle conversion 
and distribution center in Aloes, in Mpumalanga.  This 
multimillion rand storage and logistics facility is 
due to open during the second quarter of 2008.  Other 
plans include the launch of ten new products in 2008 
slated to boost market share. This continues the trend 
set last year, when the company also launched ten new 
vehicles.  GMSA's retailer network, now standing at 
152 outlets, invested R812 million ($105 million) over 
the past few years in upgrading its facilities.  A key 
area for GMSA going forward is the light commercial- 
vehicle (LCV) market, where it secured an overall 
share of 23% in 2007, through buoyant sales of the 
Isuzu KB and Corsa Utility pick-ups.  (Engineering 
News, February 1, 2008) 
 
------------------------------------------ 
Ford Increases Investment and Localization 
------------------------------------------ 
 
¶6. (U) Ford announced a R1.5 billion ($215 million) 
expansion program to expand operations for its next 
generation compact pickup truck and its turbocharged 
Puma diesel engine.  Construction will begin in 2009. 
QPuma diesel engine.  Construction will begin in 2009. 
Ford will begin manufacturing the pick-ups at its 
Silverton assembly plant in Pretoria in 2010 and the 
diesel engines at its engine factory in Struandale, in 
Port Elizabeth in 2011.  Ford South Africa CEO Hal 
 
PRETORIA 00000268  003.2 OF 007 
 
 
Feder said South Africa was a highly capable and 
proven export source that could "successfully deliver 
at the highest level of global competition".  The 
investment is expected to increase annual capacity at 
the Silverton plant from 60,000 to 110,000 vehicles, 
with 75% of the pickups destined for export to Europe, 
the Middle East and the rest of Africa.  The 
Struandale plant will raise annual production for its 
Puma diesel engine and components to about 180,000 
units, with the majority being exported.  Ford plans 
to increase spending on local components from an 
annual R441 million ($57 million) to R2.9 billion 
($0.4 billion) by 2011.  Ford currently achieves about 
35% local content, which will improve to more than 60% 
when production begins.  Ford has 4,500 employees at 
the two plants and expects to hire as many as 500 more 
by 2011.  Ford estimates that an additional 4,000 
indirect jobs will be created as the domestic auto- 
parts industry supplies parts for both a greater 
number of vehicles and a larger percentage of local 
content.  (Business Day, February 1, 2008 and Ford 
January 30, 2008 Press Release) 
 
------------------------------ 
Renault to Invest in New Plant 
------------------------------ 
 
¶7. (U) DTI Officials told Embassy Economic Officers on 
February 4 that Renault plans to invest in a new, 
greenfield automobile assembly plant that will take 
advantage of the same MIDP incentives that were 
incorporated into the above-mentioned Ford expansion. 
This will be Renault's first production facility in 
South Africa and production will be about 100,000 
vehicles per year.  The main difference between the 
two investments is that the expanded Ford plant in 
Silverton will replace five low-volume existing 
production lines with two high-volume lines, while the 
Renault plant will introduce a completely new line for 
the Sandero hatchback in a completely refurbished 
former Nissan plant in Guateng. 
 
----------------------------- 
SA to Import Chinese Vehicles 
----------------------------- 
 
¶8. (U) McCarthy Limited signed a distribution 
agreement with Chery Automobile Company of China to 
import Chinese-made cars to South Africa starting 
April 2008.  Chery estimates that sales volume will 
exceed 5,000 units by the end of 2008.  McCarthy 
Import and Distribution Executive Director Jolyon Nash 
said, "Details of the models we will market in South 
Africa are still being finalized."  Chery Automobile 
Chairman Yin Tongyao was "pleased to be a player in a 
market that will provide a springboard for sales of 
our products into other African countries".  Chery is 
the fourth-ranked Chinese automobile manufacturer in 
passenger car production.  (Business Day, February 1, 
2008) 
 
--------------------------------------- 
Power Crisis Leads to Executive Shakeup 
QPower Crisis Leads to Executive Shakeup 
--------------------------------------- 
 
¶9. (U) Eskom replaced Ehud Matya as head of it's 
Primary Energy and Power Plant Division in the 
 
PRETORIA 00000268  004.2 OF 007 
 
 
aftermath of weeks of crippling power generation 
problems.  On February 4, 2008, Eskom had 3,000 
megawatts out of commission due to planned maintenance 
and 2,388 megawatts unavailable due to unexpected 
outages.  An additional 4,060 megawatts was offline 
due to load losses resulting from either poor quality 
coal or wet coal.  Maroga said: "We are undoubtedly 
experiencing one of our most difficult periods in 
Eskom's recent history, as power supply interruptions 
reach a level that is unprecedented in South Africa." 
Brian Dames will now be responsible for primary 
energy, power plants, and capital investment. 
According to an Eskom spokesperson, CEO Jacob Maroga 
wanted the various components of power generation 
consolidated under one manager.  Matya, who remains a 
company executive, will be responsible for negotiating 
power buy-back from big industrial users.  The 
management shake-up means that Dames will continue 
heading up the investment of R300 billion ($39 
billion) in new power plants in the next five years, 
in addition to being responsible for coal sourcing and 
maintaining 39,200 megawatts of existing capacity. 
(Business Report, February 5, 2008) 
 
----------------------------------------- 
Infrastructure Problems Affect Production 
----------------------------------------- 
 
¶10. (U) Steel maker Highveld Steel & Vanadium warned 
that unannounced municipal water supply and 
electricity interruptions pose severe challenges to 
business.  It called for the government to prioritize 
capital investment for electricity, water, and rail 
infrastructure.  In the second half of 2007, 
production was negatively affected by random 
electricity and water supply interruptions.  The group 
said load shedding and demand market participation 
agreements with Eskom resulted in 35 hours of lost 
production, equivalent to about 2,000 tons of finished 
rolled steel products.  Power Interruptions in January 
2008 posed a considerable threat to operations, with 
150 hours of lost production, equivalent to about 
8,500 tons of lost production.  However, the group 
posted strong results for the year to December 2007, 
with overall demand for steel and vanadium strong. 
Net cash generated by operating activities rose 41% to 
R1.3 billion ($173 million) after demand and prices 
for steel and vanadium rose.  (Business Day, February 
7, 2008) 
 
------------------------------------ 
Coega Aluminum Project Cast in Doubt 
------------------------------------ 
 
¶11. (U) Power shortages cast doubts on prospects for 
Rio Tinto's Coega aluminum smelter project in Port 
Elizabeth.  In November 2006, Eskom signed a 25-year 
contract to supply 1,350 megawatts of electricity to 
the smelter by 2014.  Eskom has since announced a 
power deficit to continue until at least mid-2012. 
Macro analyst Nazmeera Moola criticized the Coega 
QMacro analyst Nazmeera Moola criticized the Coega 
project since aluminum smelters use 6.5% of Eskom's 
total electricity while contributing only 0.1% to 
gross domestic product.  Rio Tinto Chief Executive of 
Energy and Minerals Preston Chiaro said Rio Tinto 
would proceed with the Coega project as long as the 
government and Eskom provided assurances that there 
 
PRETORIA 00000268  005.2 OF 007 
 
 
would be power to supply it.  If Eskom could no longer 
provide power guarantees, then Rio Tinto would have to 
look at energy alternatives.  Rio Tinto took control 
of the Coega project last year through a $38 billion 
buyout of Alcan, and has just rejected BHP Billiton's 
$150 billion buy out offer.  BHP Billiton also 
reported that power constraints had prevented the 
expansion of its three aluminum smelters in South 
Africa and Mozambique.  (Financial Mail, February 8, 
2008 and Business Report, February 7, 2008) 
 
--------------------------------- 
Power Cuts Put Rand on Rocky Road 
--------------------------------- 
 
¶12. (U) Analysts expect economic growth in South 
Africa to slow from about 5% in 2007 to 3%-4% in 2008, 
curbed mainly by the effect of frequent power outages 
on production and higher interest rates on consumer 
spending.  This has added to growing fears of a U.S. 
recession, which prompted a risk-averting sale of 
local shares and bonds last month and an initial 
weakening of the rand.  So far this year the volatile 
unit has depreciated more than 13% against the dollar 
and more than 11% against a trade-weighted basket of 
currencies.  Traders and analysts said the rand was 
now on course to slide to R8.25 or R8.30 against the 
dollar, which will add to upward pressure on 
inflation, and raise the risk of further interest rate 
hikes.  One of the main problems for the rand is the 
ballooning South African current account deficit, now 
at more than 8% of gross domestic product (GDP).  With 
a global economic slowdown curbing demand for exports 
and an official R482 billion ($63 billion) 
infrastructure spending plan boosting imports, the 
shortfall can only continue to widen.  If the 
shortfall is not offset by similar amounts of 
investment inflows, which in South Africa's case come 
mainly from portfolio investments in local shares and 
bonds, the rand has to weaken.  This will stoke 
inflation, which has already breached the upper end of 
the 3%-6% official target range for consecutive nine 
months, reaching 8.6% in December 2007.  JPMorgan 
urged investors to trim holdings of South African 
shares, citing electricity shortages, political 
uncertainty and a potential U.S. recession. "We are 
concerned that South African-specific risks have 
escalated ... the electricity crisis has shaken our 
confidence in South Africa's growth outlook." 
(Business Day, February 8, 2008) 
 
------------------------------------------ 
Business Confidence Falls to Four-Year Low 
------------------------------------------ 
 
¶13. (U) The South African Chamber of Commerce and 
Industry (SACCI) business confidence index (BCI) 
dropped from 94.8 points in December 2007 to 93.8 
points in January 2008.  SACCI said that apart from a 
single instance in April, when the BCI jumped to 101.9 
Qsingle instance in April, when the BCI jumped to 101.9 
points, the index had been in a declining trend 
throughout 2007.  This is the lowest January level 
since 2003, when the BCI stood at 82.8 points, and the 
lowest overall level since October 2003, when it stood 
at 91.6 points.  According to the SACCI, the negative 
business sentiment was due to declining international 
trade volumes, a weaker rand, rising inflation and a 
 
PRETORIA 00000268  006.2 OF 007 
 
 
falling stock exchange.  However, the negative 
sentiment was partially offset by record precious 
metal prices, slightly positive data on retail and 
vehicle sales and lower real financing costs. 
(Business Day, February 6, 2008) 
 
--------------------------- 
SADC to Boost Air Transport 
--------------------------- 
 
¶14. (U) The Southern African Development Community 
(SADC) prioritized air transport as a measure for 
delivering a quality 2010 FIFA World Cup and the 2009 
FIFA Confederations Cup.  A joint meeting of SADC, 
Common Market for Eastern and Southern Africa (COMESA) 
and the East African Community (EAC) Civil Aviation 
Directors and industry executives highlighted a need 
for interventions and improvements.  The officials 
identified a shortage of human resources such as 
pilots and navigation agencies as challenges in the 
Victoria Falls region.  The meeting cited the airline 
industry's ability to meet ever-increasing demand as 
another challenge facing SADC.  Delegates stressed the 
need to provide efficient, cost effective, and 
affordable air transport service, with emphasis on the 
introduction of direct city-to-city flights.  They 
resolved to establish working groups, tasked with 
developing and implementing government interventions 
such as a fast-track Open Skies Policy. 
Representatives of the International Civil Aviation 
Organization, Airline Association of Southern Africa, 
and the International Air Transport Association were 
also present.  (Engineering News, February 4, 2008) 
 
------------------------------------- 
Vodacom Offers Free Upgraded Internet 
------------------------------------- 
 
¶15. (U) Vodacom is driving mobile-data connections 
with its latest move to offer a free upgraded high- 
speed internet service to existing subscribers for 
three months.  Vodacom's move follows that of rival 
MTN, which announced last week that it would offer 
higher-speed data at selected metropolitan locations 
at no extra charge.  Vodacom said this move would 
allow customers to access the fastest mobile broadband 
connection and attract new data customers.  Customers 
who have devices, such as the Vodafone Mobile Connect 
USB Modem, will be able to add the new service, a 
high-speed downlink packet access (HSDPA) of 3.6 
megabits per second, to existing data packages.  HSDPA 
is a third-generation, mobile-telephony protocol which 
offers increased data transfer speeds and capacity. 
(Business Report, January 30, 2008) 
 
------------------------ 
DEAT Bans Abalone Diving 
------------------------ 
 
¶16. (U) The Department of Environmental Affairs and 
Tourism (DEAT) announced new regulations restricting 
abalone diving on February 1, 2008.  DEAT Minister 
Marthinus Van Shalkwyk said the ban is an essential 
component of DEAT's strategy to protect abalone in key 
Qcomponent of DEAT's strategy to protect abalone in key 
areas where the stocks have a potential to recover 
from serious depletion.  The ban will be imposed in 
five areas including Robben, Dyer and Bird Islands, as 
 
PRETORIA 00000268  007.2 OF 007 
 
 
well as Cape Point and the coastal area between 
Gansbaai and Quon Point.  The ban was met with strong 
objections from local fishermen.  South Africa reduced 
abalone harvest quotas from 3,000 tons in 1965 to 125 
tons in 2007.  However, stock depletion continued due 
to illegal harvesting.  (Business Day, February 4, 
2008 and DEAT Media Statement) 
 
END TEXT 
BOST