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FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4034
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEHJO/AMCONSUL JOHANNESBURG 7971
RUEHTN/AMCONSUL CAPE TOWN 5475
RUEHDU/AMCONSUL DURBAN 9702

UNCLAS SECTION 01 OF 04 PRETORIA 000704 
 
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 APRIL 4, 2008 
ISSUE 
 
PRETORIA 00000704  001.2 OF 004 
 
 
¶1. (U) Summary.  This is Volume 8, issue 14 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- SA Achieves a 0.9 % Budget Surplus 
- Manufacturing Activity Dips to Near-Five-Year Low 
- Trade Deficit Narrows, But Outlook Still Negative 
- South Africa and Turkey Seek Stronger       Economic Ties 
- SAA and Turkish Airlines to Boost Passenger  Volumes through Star 
Alliance 
- Smelters and Power - Eskom Favors Sticks over  Carrots 
- Set-Back for Independent Power Production 
- Under-Utilized Land Targeted for Bio-fuels Crops 
- Mining Skills Exodus 
End Summary. 
 
---------------------------------- 
SA Achieves a 0.9 % Budget Surplus 
---------------------------------- 
¶2. (U) Finance Minister Trevor Manuel announced that South Africa 
had achieved a budget surplus of 0.9% of gross domestic product 
(GDP) in FY 2007/08.  Manuel said a revenue overrun and under 
spending had pushed the surplus on the state's budget in FY2007/08 
from an estimated R10.7 billion (0.5% of GDP) to R18.5 billion (0.9 
% of GDP).  According to the South African Revenue Service (SARS), 
personal income tax rose by 20% to R169.1 billion ($21.1 billion), 
corporate tax by 20% to R143 billion ($17.9 billion), secondary tax 
on companies by 31% to nearly R20 billion ($2.5 billion), 
value-added tax (VAT) by 11% to R149.7 billion ($18.7 billion), 
excise duty by 1% to R18.1 billion ($2.3 billion), fuel levy by 7% 
to R23.5 billion ($2.9 billion), and customs duty by 13% to R26.7 
billion ($3.3 billion).  SARS said higher corporate income tax 
collections were achieved due to higher profits as a result of 
strong growth in domestic demand and improved commodity prices. 
Improved tax enforcement and compliance, and a broader tax base had 
also contributed to higher corporate tax collection.  The 
manufacturing sector made the biggest contribution to corporate tax 
amounting to R32 billion ($4 billion), or 22% of the total R143 
billion ($17.9 billion) paid in corporate tax.  This was nearly 
double the R17 billion ($2.1 billion), or 12% of the total corporate 
tax paid by the mining sector.  However, mining companies paid 29% 
more tax in FY2007/08 than in the previous year, as commodity prices 
soared, while manufacturers paid 14% more.  According to ABSA 
Economist Ridle Markus, the weaker rand, on average R7.05 to the 
dollar last year, compared with an average R6.76 the previous year, 
has boosted profits for all exporters, as earnings in rand terms are 
higher when the rand is weaker.  Financial services companies paid 
R15.6 billion (11%), or 27% more, while the wholesale and retail 
trade sectors contributed R14.2 billion (10 %), 17% more than the 
previous year.  Banks contributed R11.3 billion (8%) to the total 
corporate tax, 30% more than the previous fiscal year.  By far the 
biggest increase in tax was in the tiny recreational and cultural 
sector, which contributed only 2%, but paid a massive 53% more than 
the previous year.  SARS has achieved revenue overruns almost every 
year since its inception in 1998.  The overruns are often criticized 
because they have pushed the ratio of tax to GDP to about 29%, which 
Qis high compared to comparable developing countries, but low 
compared to developed countries that have a social security system 
in place.  (Business Report, April 2, 2008) 
 
--------------------------------------------- ---- 
Manufacturing Activity Dips to Near-Five-Year Low 
--------------------------------------------- ---- 
¶3. (U) The Investec purchasing managers' index (PMI) dropped from 
46.4 points in February to 43.7 points in March, its lowest level 
since June 2003.  The fall shows that manufacturing is under 
pressure, mainly as a result of easing consumer demand due to higher 
interest rates, continued strong inflation and a national power 
shortage.  "The underlying figures paint a deteriorating picture of 
business conditions in the manufacturing sector," said Andre Roux, 
head of fixed income at Investec Asset Management, the survey's 
sponsors.  "Given limited prevalence of power outages during the 
month, the decline is a result of the weaker real economy and high 
input cost inflation on the manufacturing sector," he said. 
(Business Day, April 1, 2008) 
--------------------------------------------- ---- 
Trade Deficit Narrows, But Outlook Still Negative 
--------------------------------------------- ---- 
¶4. (U) The South African Revenue Service (SARS) reported that SA's 
 
PRETORIA 00000704  002.2 OF 004 
 
 
trade deficit narrowed sharply from R10.2 billion ($1.3 billion) in 
February to R5.8 billion ($0.7 billion) in March, as a weaker rand 
boosted the value of exports.  Exports leapt 19.3% to R46.95 billion 
($5.9 billion) as the value of cars shipped abroad more than doubled 
from the previous month, while coal exports rose 17%.  Imports 
increased 6.4% to R52 billion ($6.5 billion), boosted mainly by 
purchases of machinery, electrical equipment, motor vehicles, 
aircraft and vessels.  Oil accounted for almost 20% of the import 
bill and demand for capital imports is rising in response to the 
SAG's infrastructure spending drive.  Standard Bank Economist 
Shireen Darmalingam said the trade balance is likely to stay deep in 
the red this year, putting more pressure on the rand to depreciate. 
"The deficit on the trade account, coupled with a large deficit on 
the current account, leaves the currency vulnerable and in a rather 
precarious position going forward, she said.  The rand has weakened 
about 15% against the dollar so far this year, and nearly 20% 
against a trade-weighted basket of currencies monitored by the South 
African Reserve Bank (SARB).  The trend is seen as inevitable given 
the deficit on the current account, which widened to 7.3% of gross 
domestic product (GDP) in 2007, a 36-year peak.  The deficit was 
financed by foreign purchases of shares and bonds in recent years, 
but so far this year the flows have reversed, on rising global risk 
aversion and concerns over slower local economic growth.  (Business 
Day, April 1, 2008) 
------------------------------------- 
South Africa and Turkey Seek Stronger       Economic Ties 
------------------------------------- 
¶5. (U) South African Minister of Trade and Industry Mandisi Mpahlwa 
and Turkish Minister of Energy and Resources Dr Hilmi Guler 
participated in an inaugural Joint Economic Committee (JEC) meeting 
in a bid to boost bilateral trade and investment ties.  Turkish 
trade statistics indicate that the volume of bilateral trade for 
2007 stood at $2.8 billion with more than 76%, or $2.1 billion, of 
that arising in the form of South African exports to Turkey.  Agenda 
items for the meeting included a program of action for sectors in 
which the two countries aim to cooperate.  South Africa was Turkey's 
largest trading partner in Sub-Saharan Africa and Turkey had a 
stated goal of boosting its trade with Africa to $30 billion by 
¶2010.  (Engineering News, March 28, 2008) 
 
------------------------------------------- 
SAA and Turkish Airlines to Boost Passenger   Volumes through Star 
Alliance 
------------------------------------------- 
 
¶6. (U) The Turkish national carrier joined the Star Alliance group 
on April 1, 2008.  Turkish Airlines is adding an additional 31 
destinations to Star Alliance's destinations, and South African 
Airways (SAA) CEO Khaya Ngqula said it was already in discussions 
with the Turkish carrier.  Ngqula said that talks were under way to 
sign a code-sharing agreement.  SAA Head of Network Development, 
Alliances and Aero-political Affairs Jason Krause explained that 
such an agreement would mean that SAA would link its major hub in 
Johannesburg with Turkish Airline's hub in Istanbul.  Krause said 
QJohannesburg with Turkish Airline's hub in Istanbul.  Krause said 
that Turkish Airlines currently operated three weekly flights 
between Istanbul and South Africa, flying to Johannesburg and Cape 
Town.  A code-sharing agreement would allow SAA to operate the 
Turkish carrier's final leg-the stretch between Johannesburg and 
Cape Town-on its domestic flights.  Krause said that this move would 
add at least 540 additional passengers a week to SAA's domestic 
flights, and that it would also allow it to sell Istanbul as a 
destination.  Turkish Airlines would also be able to use its 
aircraft more strategically, he added.  (Engineering News, April 2, 
2008) 
 
--------------------------------------------- 
Smelters and Power - Eskom Favors Sticks over  Carrots 
--------------------------------------------- 
¶7. (U) A Business Day editorial questioned BHP Billiton's firing of 
its banker Standard Bank for suggesting that BHP's Hillside aluminum 
smelter at Richards Bay be shut down as the smelter did not provide 
economic value to SA and was consuming a great deal of electricity. 
The company took umbrage and instructed staff to pull a big chunk of 
its business from Standard Bank.  The editorial noted that the 
smelters are Eskom's most energy intensive customers, using 2,100 MW 
or more than five percent of Eskom's total capacity and employ 
relatively few people.  During the power crunch, are there economic 
benefits that outweigh the energy disadvantages, asked the 
editorial?  A separate report by Standard & Poor's suggested that 
 
PRETORIA 00000704  003.2 OF 004 
 
 
the power shortages are a stress to the economy, rather than a 
ratings threat.  S&P projects that it would take until 2013 before 
electrical power capacity attains the level required to meet 
expected demand with a 15% buffer.  In January, S&P placed state 
power supplier Eskom on Credit Watch with negative implications on 
expectations of a material increase in the capital expenditure 
program.  The rating agency observed that some relief might come 
from a hike in electricity prices, noting Eskom's recent application 
for a 60% tariff increase to combat rising coal and fuel costs. 
Meanwhile, over 100 firms have responded to Eskom's request for 
cogeneration projects, potentially adding 1,000 to 3,000 MW to the 
national grid if Eskom can work out power purchase agreements. 
Eskom continues to criticize residential and small commercial 
customers for failing to curb their power use, threatening to impose 
greater load-shedding.  Eskom so far has favored "sticks" over 
"carrots" in seeking to modify consumer behavior.  (Business Day, 
Engineering News, April 2-3, 2008) 
----------------------------------------- 
Set-Back for Independent Power Production 
----------------------------------------- 
¶8. (U) The Department of Minerals and Energy terminated a R5 billion 
($650 million) contract with a consortium led by U.S. power producer 
AES to build two open-cycle, gas turbine plants.  The contract was 
awarded in August 2007 and was the first awarded to an independent 
power producer (IPP).  It was hailed as a boost to independent 
producers.  However, DME has claimed that AES could not meet its 
obligations and has pulled the plug on the contract.  AES 
Spokeswoman Robin Pence said the company had been content for the 
contract to lapse because the project was no longer viable.  Asked 
if the parameters were changed after the contract award, Pence said 
yes, but declined to give further details.  AES would have owned and 
operated the two plants - one near Durban with a generating capacity 
of 760MW and the other near Port Elizabeth with a capacity of 342MW 
- and Eskom would have bought the electricity for 15 years.  With a 
combined generating capacity of 1000MW - the equivalent of just less 
than 3% of SA's current generating capacity - the plants would have 
provided much-needed peaking power generation capacity to mitigate 
the country's electricity supply problems.  DME Officials emphasized 
that while the DME was still "looking to go forward with the process 
of attracting IPPs", the prognosis was bleak with the demise of this 
deal.  The DME could seek an alternative operator, but delays were 
likely.  The two plants were expected to have been operational 
before the end of 2009. With the termination of AES's contract, that 
ambitious timeline is unlikely to be kept.  This is also a blow to 
plans to dilute power utility Eskom's monopoly on power generation. 
The SAG has established a policy requiring that the private sector 
build 30% of new generating power through IPPs.  Despite the 
government's stated intention of encouraging private sector 
participation, an unattractive regulatory environment and power 
prices that are too low to be globally competitive have kept IPPs at 
Qprices that are too low to be globally competitive have kept IPPs at 
bay.  (Business Day, April 3, 2008) 
--------------------------------------------- --- 
Under-Utilized Land Targeted for Bio-fuels Crops 
--------------------------------------------- --- 
¶9. (U) South Africa's draft bio-fuels strategy suggests the use of 
the more than 2.5 million hectares of under-utilized land in the 
former homeland regions to grow bio-fuel crops.  The plan is 
designed to breach the gap between the country's "haves" and the 
"have-nots" by allowing new farmers to grow bio-fuel crops. 
Department of Agriculture Director of Agricultural Engineering 
Services At van Coller noted that the targeted areas would be in the 
eastern parts of the country, because climate change is anticipated 
to increase rainfall in this part of the country.  However, he 
cautioned that it would be costly to develop these areas because of 
lack of adequate transport and storage infrastructure.  Van Coller 
estimated that it could cost up to $1,900-$2,500/hectare to develop 
this land, compared to $650/hectare for unutilized commercial 
farmland.  Van Coller added that the final development plan for 
these areas could cost the SAG over $6.26 billion before bio-fuels 
production could commence. (Business Day, March 27, 2008 and 
Business Report, March 26, 2008) 
-------------------- 
Mining Skills Exodus 
-------------------- 
 
¶10. (U) Gold Fields CEO Ian Cockerill became the fourth South 
African mining chief within a year-and the third in the gold 
sector-to announce his resignation.  His departure follows the 
resignations of Anglo Platinum CEO Ralph Havenstein, Harmony Gold 
 
PRETORIA 00000704  004.2 OF 004 
 
 
Mining's CEO Bernard Swanepoel, and AngloGold's CEO Bobby Godsell. 
Cockerill said he had been made an "intriguing" offer by a company 
outside the gold sector.  Cockerill will be succeeded by CFO Nick 
Holland, who has held that post for ten years.  An industry insider 
attributed the skills exodus from both senior and middle mining 
management to government interference, growing concerns about the 
power crisis and political transition, and an upsurge in crime.  A 
separate news piece noted that mining academics at the Wits School 
of Mining Engineering are leaving South Africa for salaries three 
times higher abroad.  South Africa continues to provide a good 
training ground to meet demand abroad as a result of the commodities 
boom.  (Business Day, April 1-2, 2008) 
 
 
BOST