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UNCLAS SECTION 01 OF 04 PRETORIA 000763 
 
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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 11, 2008 
ISSUE 
 
PRETORIA 00000763  001.2 OF 004 
 
 
¶1. (U) Summary.  This is Volume 8, issue 15 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- Reserve Bank Lifts Repo Rate 
- Surprise Surge in Factory Output 
- Eskom Defends Hikes as Predictions Were Off 
- Even State Housing Projects Can't Plug In 
- DEAT Rejects Titanium Mining Proposal 
- Oops!  Ugandan Minister Publicly Criticizes SAG  Telecom Policies 
- Telkom Flounders over Business Strategy 
- Oger to Renew Telkom Bid 
- Neotel Brings Competition to Telkom 
End Summary. 
 
 
---------------------------- 
Reserve Bank Lifts Repo Rate 
---------------------------- 
¶2. (U) The South African Reserve Bank (SARB) raised its policy 
interest rate (repo rate) by 50-basis-points to 11.5% on April 10, 
after inflation surged to a five-year high and moved further away 
from the 3-6% target range.  The half-percentage-point rise resumes 
a monetary tightening cycle that paused in January on concerns over 
economic growth, and brings the total rate hikes to 450 basis-points 
since June 2006.  While consumer spending has cooled, inflation 
continues to beat expectations, with the targeted CPIX inflation 
(CPI less mortgage interest) hitting 9.4% y/y in February, the 11th 
month it has exceeded the target band.  (Business Day, April 10, 
2008) 
 
-------------------------------- 
Surprise Surge in Factory Output 
-------------------------------- 
¶3. (U) Statistics South Africa (StatsSA) reported that manufacturing 
output increased from 1.2% y/y in January to 3.5% y/y in February. 
The increase surprised markets.  Power outages and waning consumer 
demand had fanned fear of a fall in output in the manufacturing 
sector, which accounts for more than 16% of the economy.  "Barring a 
collapse in March, output in the sector will probably be less of a 
drag on first-quarter growth than we anticipated," said Citigroup 
Economist Jean Francois Mercier.  Mining and manufacturing are seen 
to have been hit hardest by Eskom's power shortages.  Gains were 
most pronounced in value-added sectors such as vehicles and parts, 
which rose 6% in February, electrical machinery, which rose 16.7%, 
and household appliances, up 9.9%.  Analysts said resilience in 
manufacturing output stemmed from the depreciation in the rand, more 
than 12% weaker against the dollar and 16% weaker on a 
trade-weighted basis this year. "Weakness in the rand from the 
beginning of 2008 is inflating the value of manufacturing sales and 
supports manufacturing exports, which in turn should provide 
momentum to production," Efficient Research Economist Fanie Joubert 
said.  However, the outlook for the sector this year is still poor, 
in the face of a global slowdown, waning consumer demand, and 
continued power rationing.  (Business Day, April 10, 2008) 
------------------------------------------- 
Eskom Defends Hikes as Predictions Were Off 
------------------------------------------- 
¶4. (U) Eskom has justified its request for a 53% real increase in 
its electricity tariffs (also referred to as 60% nominal increase) 
by stating that the price is too low and consumers should carry the 
costs of fuel and coal price hikes.  Eskom CEO Jacob Maroga said 
Qcosts of fuel and coal price hikes.  Eskom CEO Jacob Maroga said 
Eskom could not accurately predict coal prices, particularly spot 
coal, over a multi-year pricing model.  Maroga said there were three 
main drivers for the price increase: the short-term contracts for 
coal supply, which include increasing transport costs; the rising 
cost of diesel, which is used in some turbines; and Eskom's attempts 
to fast-track certain projects on the demand side that would cost 
more money.  Coal stock levels were hampered recently by rains and a 
strike.   Contracts have now been secured for 39 million tons of 
additional coal over the next two years.  Maroga said, 
"load-shedding is not our preferred option.  It pains us to do so, 
and we know it causes consumers a lot of stress.  It can be avoided 
if customers reduce their consumption."  Electricity regulator NERSA 
gave Eskom permission to have "commercially sensitive" information 
on its tariff increase withheld from publication.  The entire 
application was to be posted on the NERSA web-site for public 
comment.   NERSA recently asserted that if Eskom achieved its 
requested increase, the state power supplier would earn a whopping 
 
PRETORIA 00000763  002.2 OF 004 
 
 
after-tax profit of over $1.5 billion.  (Pretoria News, Engineering 
News, April 3-8, 2008) 
----------------------------------------- 
Even State Housing Projects Can't Plug In 
----------------------------------------- 
¶5. (U) Two low-cost National Housing Finance Corporation (NHFC) 
housing projects involving 834 housing units and a total investment 
of $13 million are at risk because of Eskom's new policy on new 
developments.  A NHFC spokesperson confirmed that these projects 
would be at risk if Eskom did not provide electricity to new 
low-cost housing projects, even though this project already has 
approved loans.  Eskom said last month it would take up to six 
months to give a quote on new applications for projects requiring 
more than 100 kilovolt amperes of electricity.  Eskom confirmed its 
recent rejection of an application for bulk electricity supply to a 
public-private partnership for a mixed housing development that 
would provide 9,315 residential units.  The construction industry 
has been particularly critical of this policy.  (Business Report, 
April 2, 2008) 
------------------------------------- 
DEAT Rejects Titanium Mining Proposal 
------------------------------------- 
 
¶6. (U) The Department of Environmental Affairs and Tourism (DEAT) 
rejected Australia-based Mineral Commodities' (MRC) proposal to mine 
titanium in the Xolobeni dunes of Port Edward south of Durban. 
Exploratory drilling revealed that the dunes contain the 
tenth-largest titanium deposits in the world, which could be worth 
over R10 billion ($1.3 billion).  MRC argued that the operation 
could help eradicate poverty by developing the area and creating job 
opportunities with minimal environmental impact.  DEAT rejected 
MRC's environmental impact assessment report and cited deficiencies 
in several areas.  According to DEAT, the MRC report does not 
address dune rehabilitation or waste storage and treatment issues. 
The dunes lie next to nature reserves on the border of the Kwa-Zulu 
Natal and the Eastern Cape Provinces, which are slated for 
ecotourism development.   A DEAT report classified the area as one 
of the highest conservation priority areas.  A Department of 
Minerals and Energy official lamented that a compromise, "win-win" 
situation could only be achieved if DEAT was not trying to declare 
the entire coastline off limits for mining.  Meanwhile, an amendment 
in the National Environmental Management Act to make DEAT the final 
appeals authority on mining EIA is well underway.  (Financial Mail, 
April 11, 2008) 
 
--------------------------------------------- -- 
Oops!  Ugandan Minister Publicly Criticizes SAG  Telecom Policies 
--------------------------------------------- -- 
¶7. (U) Uganda's Minister for Information and Communications 
Technologies Alintuma Nsambu chided the SAG for meddling too much in 
the telecom sector, saying a lighter touch would grow the industry, 
cut the cost of services and help local companies to flourish. 
Nsambu was sharing a stage with SA Science and Technology Minister 
Mosibudi Mangena at the Satcom Africa conference in Johannesburg, 
when he suggested that SA should rethink its telecoms regulations. 
Later he apologized for making his criticisms in public instead of 
QLater he apologized for making his criticisms in public instead of 
discussing them in private.  Mangena said the reproaches should be 
directed at SA's Department of Communications and Department of 
Trade and Industry instead.  According to Nsambu, the government's 
role should be to support private companies by removing any 
bottlenecks, such as ensuring that officials did not need bribing to 
get things done or to allow equipment to clear customs. 
"Liberalizing the telecom sector means discouraging monopolies or 
duopolies," he said in a dig at SA, where Neotel was belatedly 
granted the sole license that opened up competition to Telkom.  Then 
he took another jab, saying the private sector should be left to 
build and operate under-sea telecommunications cables.  SAG is 
already championing its involvement in at least two under-sea cable 
projects, and is jeopardizing plans to increase Africa's bandwidth 
by insisting that private cables may land in SA only if they are 
majority African-owned.  Nsambu attacked the high cost of Internet 
access in SA, even though the country is not reliant on expensive 
satellite connections.  "Ironically, in SA the cost of internet 
usage isn't cheap," he said.  Much of SA's international traffic is 
carried on the undersea cable with prices that Telkom has kept 
artificially high.  Nsambu said full liberalization of the telecoms 
sector was extremely important for any nation's economy.  Mangena 
denied that progress in SA was shackled by the SAG's regulation of 
undersea cables or by creating Infraco as a state-owned supplier of 
 
PRETORIA 00000763  003.2 OF 004 
 
 
broadband infrastructure.  Some areas could be liberalized further, 
but the regulatory environment laid the ground rules rather than 
inhibited progress, Mangena said. 
--------------------------------------- 
Telkom Flounders over Business Strategy 
--------------------------------------- 
¶8. (U) After playing up its plans to become a significant force in 
the pay-TV industry, fixed-line operator Telkom has changed 
direction and is leaving the sector.  CEO Reuben September surprised 
analysts when he outlined plans to reduce Telkom's shareholding in 
Telkom Media from 66% to what he describes as "the smallest possible 
stake".  At the same time, Telkom has announced plans to take the 
fight to the cellular operators, including associate Vodacom, in 
which it holds a 50% stake, by building its own mobile network.  The 
plan illustrated the untenable nature of the company's stake in 
Vodacom.  Both Vodacom and MTN are building national fixed-line 
networks that will enable them to compete aggressively with Telkom. 
The latest developments have some analysts wondering whether Telkom 
has a coherent strategy.  In pay-TV, it is clear that management has 
had a change of heart.  The company now says there are other 
projects that will deliver a better return more quickly.  These 
include offshore expansion and investment in new wireless networks. 
September obfuscated when asked whether Telkom was open to selling 
its stake in Vodacom without an alternative mobile investment lined 
up.  Domestically, Telkom planned to invest in a fixed-wireless 
network and in a mobile data network that will compete with the MTN 
and Vodacom offerings.  However, Telkom could still find itself the 
prey of a larger operator.  It has already rejected a non-binding 
offer from Oger Telecom of Dubai, but September said the company has 
"no emotional hang-ups" about selling part or all of the business if 
the right offer is tabled. 
------------------------ 
Oger to Renew Telkom Bid 
------------------------ 
¶9. (U) CEO Paul Doany said Oger Telecom of Dubai will renew its 
offer for Telkom.  Telkom said it would not consider the sale 
without a "strategic rationale" and rejected Oger's undisclosed 
proposal on grounds that it was not in the shareholders' interest. 
But Doany, also chairman of land-line operator Turk Telekom, told 
Reuters that Oger planned a fresh offer that will benefit all 
stakeholders.  Oger, controlled by the family of late Lebanese Prime 
Minister Rafik Hariri, also operates in Saudi Arabia, Lebanon, and 
Jordan.  Doany said Oger's Telkom offer, which was for a substantial 
minority stake with management control, would aim at merging Oger's 
South African mobile subsidiary Cell C (the number three mobile 
operator after Vodacom and MTN) with Telkom's fixed-business.  Doany 
dismissed Telkom's concerns that Oger's offer did not have a 
strategic rationale.  Doany said Oger wanted to create a structure 
in South Africa similar to Turkey, where it has a controlling 55% 
stake in Turk Telekom and 81% in Avea (Turkey's third-largest mobile 
operator).  "We are producing good results in Turkey and we want to 
have the same in South Africa because the two markets resemble each 
Qhave the same in South Africa because the two markets resemble each 
other in many ways," he said.  "We fully support the expansion plans 
of Telkom in the African continent, with South Africa being a 
natural for such expansion, focusing on segments hitherto neglected 
by other operators."  (Engineering News, April 3, 2008) 
----------------------------------- 
Neotel Brings Competition to Telkom 
----------------------------------- 
 
¶10. (U) Neotel clocked up R1 billion ($128 million) in business in 
its first year of operation and is expected to win deals worth R2 
billion ($256 million) in fiscal year 2008.  However, profits are 
still a long way off as capital expenditures of R1.5 billion ($192 
million) will soak up revenue as it rolls out more wireless and 
fiber-optic network facilities.  Neotel's plans include a R11 
billion investment over the next ten years.  CEO Ajay Pandey said 
its cash flow should turn positive after three years.  "Out of the 
top 350 customers, we have made inroads into almost 120 and we are 
beginning to get repeat orders."  So far, most companies have given 
Neotel only about 5% of their telecoms spending, but a handful now 
give it at least 25% of their voice and data contracts.  From the 
end of April, consumers in certain areas would be able to sign up 
for a Neotel line instead of a Telkom line.  Neotel will also offer 
handsets capable of handling video calls and accessing the internet. 
 Telkom announced plans to bulk up its own voice and data carrying 
capacity, largely by installing more wireless technologies.  Pandey 
said that was a smart move, as global studies showed that operators 
benefited most from market liberalization if they expanded and sold 
 
PRETORIA 00000763  004.2 OF 004 
 
 
spare capacity to rival players.  Refusing to let rivals access 
their infrastructure might appear to be a strategic advantage, but 
operators that had kept their network facilities solely for their 
own use were far less successful than those that capitalized on the 
growing demand as more rivals entered the market, Pandey said. 
Pandey said he would be happy to lease some of Telkom's 
infrastructure, but its high prices meant it was more cost effective 
for Neotel to build its own.  (Business Day, April 4, 2008) 
 
 
BOST