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UNCLAS SECTION 01 OF 04 PRETORIA 000881 
 
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 25, 2008 
ISSUE 
 
PRETORIA 00000881  001.2 OF 004 
 
 
¶1. (U) Summary.  This is Volume 8, issue 17 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- CPIX at Double Digits 
- SA Runs Risk of Sub-prime Contagion, 
    Standard & Poor's Warns 
- Golden Oldies Give JSE Vintage Edge 
- SA Cancels Cuba Debt 
- BEE Focus Shifts to Skills Development 
- SA Scours the World for Skills 
- Business Calls on Regulator to Delay Eskom     Tariff Hearing 
- Beware Sarkozy's Cozy Deals 
- Gauteng's Digital Dream Project Criticized 
- HP Predicts Exploding IT Growth 
End Summary. 
 
 
--------------------- 
CPIX at Double Digits 
--------------------- 
¶2. (U) Statistics South Africa reported that the annual rise in 
CPIX, South Africa's main inflation gauge, increased from 9.4% in 
February to 10.1% in March, its highest level since December 2002. 
Most economists had forecasted an increase of 9.7%, but the effect 
of soaring food and fuel prices were underestimated.  With food and 
petrol prices unlikely to recede soon, and hefty electricity price 
hikes likely in June, there is a strong risk that inflation could 
rise even further in 2008.  That will feed into price-setting and 
wage negotiations, making further hikes in interest rates more 
likely in June and August.  "We maintain our view that the Reserve 
Bank will have no choice but to hike interest rates by half a 
percentage point at the June meeting," JPMorgan Economist Tebogo 
Dintwe said.  Inflation measured by CPIX, which excludes mortgage 
costs, has now breached its 3%-6% target range for 12 consecutive 
months.  The South African Reserve Bank's mandate is to achieve the 
target and, unlike the FED, does not include a requirement to 
maximize economic growth, so CPIX is central to its decisions on 
interest rates.  (Business Day, April 24, 2008) 
 
--------------------------------- 
SA Runs Risk of Sub-prime Contagion, 
    Standard & -Poor's Warns 
--------------------------------- 
¶3. (U) Global ratings agency Standard & Poor's (S&P) warned that 
South Africa is among the countries outside Europe most vulnerable 
to the global credit crunch, even though it is not directly exposed 
to the fallout from the U.S. sub-prime crisis.  South Africa ranked 
11th among 40 emerging market countries on S&P's 2008 liquidity 
vulnerability index (LVI), mainly because it relies heavily on 
volatile portfolio inflows to finance the large current account 
deficit.  South Africa's current account deficit widened to R145 
billion ($18.6 billion), or 7.3% of gross domestic product (GDP) in 
¶2007.  The deficit has been comfortably financed by foreign 
purchases of local assets, mainly equities, since it first slid back 
into the red in 2003.  But the inflows have begun to recede since 
the end of 2003 as mounting global risk aversion has dented appetite 
for emerging markets.  So far this year, South Africa has 
experienced a net portfolio outflow of R4.2 billion ($0.5 billion), 
which compares poorly with a net inflow of R30.5billion ($3.9 
billion) in the first four months of 2007.  This has weighed on the 
rand and may lead to further depreciation of the currency, which 
will also have a negative impact on inflation.  The rand has lost 
Qwill also have a negative impact on inflation.  The rand has lost 
about 12% of its value against the dollar in 2008.  S&P assumes 
South Africa's current account deficit will widen to 7.8% of GDP 
this year.  However, independent forecasts predict the gap will 
shrink as strong commodity prices boost the value of local exports. 
"Our assessment is that South Africa's dependence on portfolio 
inflows is likely to continue and that these will remain volatile in 
the coming months, due to the global environment," said S&P analyst 
Remy Salters.  "The main effect is likely to be the weaker rand.  We 
assumed it could depreciate by 20%-30% against the dollar this year, 
to R8.80 or R8.90."  Salters said the rand would remain a "natural 
buffer" for the current account deficit but there was a limit to how 
much it would depreciate, given South Africa's generally sound 
economic fundamentals, which include low levels of external debt. 
Earlier this month, S&P affirmed its mid-investment BBB+ credit 
rating for South Africa, keeping it on a stable outlook. (Business 
Day, April 22, 2008) 
 
PRETORIA 00000881  002.2 OF 004 
 
 
----------------------------------- 
Golden Oldies Give JSE Vintage Edge 
----------------------------------- 
¶4. (U) Only 19 of the more than 400 companies on the Johannesburg 
Stock Exchange (JSE) have been listed for 40 years or more, but 
among them are the biggest names in business.  Insurance companies 
such as Santam and the Liberty Group are on the list, as are mining 
companies such as DRDGold and Harmony Gold.  Several industrial 
stocks are noted, such as African Oxygen and AECI.  The total market 
cap of the 19 companies is R161 billion ($20.5 billion), just more 
than 3% of the JSE's total market cap.  The JSE itself is 121 years 
old.  It opened its doors as the gold rush in the 1880s created a 
demand for a centralized market.  The oldest company on the JSE is 
DRDGold, founded and listed 113 years ago.  JSE Head Russell 
Loubser, speaking at function held by the JSE to honor its 
stalwarts, said the presence of the 19 long-lasting companies had 
"helped position the JSE as a world-class stock exchange associated 
with high market integrity, efficiency and sound practices". 
Measured by market capitalization, which is more than R5trillion 
($625 billion), the JSE is one of the globe's 20 largest exchanges 
and operates the world's largest single stock futures market. 
(Business Day, April 22, 2008) 
-------------------- 
SA Cancels Cuba Debt 
-------------------- 
¶5. (U) Chief Government Spokesman Themba Maseko announced that the 
South African Cabinet has approved the cancellation of R926.8 
million ($120.4 million) worth of debt owed by Cuba.  The debt arose 
out of insurance coverage provided to Cuba by the Export Credit 
Insurance Corporation of South Africa for the export of diesel 
engines and pesticides in 1996.  "Given the assessment of Cuba's 
debt position, government is of the view that Cuba was not in a 
position to meet its obligations in the foreseeable future." 
According to Maseko, Cuba's debt position had the potential to 
undermine bilateral economic relations and hampered the two 
countries from pursuing mutually beneficial relations in areas such 
as biotechnology, pharmaceuticals and eradicating tuberculosis and 
malaria in Africa.  (Mail and Guardian, April 17, 2008) 
-------------------------------------- 
BEE Focus Shifts to Skills Development 
-------------------------------------- 
 
¶6. (U) South African corporations are beginning to focus on elements 
of Black Economic Empowerment (BEE) other than equity ownership, 
according to a report by Grant Thornton.  Grant Thornton Eastern 
Cape Managing Partner Tony Balshaw said, "There has been a shift in 
corporate thinking with regard to BEE.  Ownership is no longer the 
foremost element in the BEE scorecard.  There is stronger emphasis 
on skills development."  Balshaw said that businesses are now 
developing people internally and fast-tracking key employees as 
their preferred BEE strategy.  "Businesses have realized that to 
achieve their BEE goals, they must place stronger emphasis on 
recruiting the right people and developing them, rather than 
focusing only on equity ownership."  The study was conducted 
recently among 300 privately held business with 100 to 400 
employees.  (Business Day, April 24.) 
Qemployees.  (Business Day, April 24.) 
 
------------------------------ 
SA Scours the World for Skills 
------------------------------ 
¶7. (U) The Department of Home Affairs (DHA) has launched a pilot 
project with large companies to recruit skilled specialists from 
abroad to address South Africa's skills crisis.  Due to the global 
shortage of skilled workers, DHA has developed the Large Account 
program to pave the way for large companies that are in dire need of 
specialized skills.  An analyst at Deloitte Global Employer Services 
said it was "refreshing to see the SAG step up to the plate of 
actually building 'scaffolding' to address the skills shortage so 
extensively identified in the Accelerated and Shared Growth 
Initiative for SA (ASGISA) and the Joint Initiative on Priority 
Skills Acquisition (JIPSA) initiatives."  DHA tested the feasibility 
of establishing a separate department to process immigration 
applications for companies which process large amounts of scarce 
skills.  Four companies were initially used in the first-stage pilot 
project between July and October 2007.  The project is now entering 
the second phase, where an additional 20 companies are to be 
selected for involvement in the process.  (Business Day, April 23, 
2008) 
------------------------------------------ 
 
PRETORIA 00000881  003.2 OF 004 
 
 
Business Calls on Regulator to Delay Eskom     Tariff Hearing 
------------------------------------------ 
¶8. (U) Business Unity South Africa (BUSA) has written to the 
National Energy Regulator of SA (NERSA) calling for it to abandon 
its current accelerated review of state power supplier Eskom's 
request for a nominal 60% tariff increase to give stakeholders 
sufficient time to compile comprehensive responses.  BUSA CEO Jerry 
Vilakazi called for greater transparency from the utility, as well 
as from government, which has come out in support for Eskom's 
application.  "We accept that current prices are not sustainable and 
will have to rise," Vilakazi said, but he stressed that BUSA was 
strongly opposed to the quantum and timing of the proposed increase, 
coming on top of an approved more modest increase that began on 
April 1.  The ANC National Working Committee agreed earlier this 
week that the application process should proceed, after previously 
calling for a halt to the public-participation process being run by 
NERSA on the rate increase application.  A Business Day editorial 
recognized the difficulty in NERSA's task whose decision will 
inevitably be controversial and politicized.  The editorial 
applauded the government's and the ANC's recent decision to convene 
an energy summit to coordinate responses to the power crisis and 
seek a broader consensus on the way forward.  The editorial worries 
that efforts to tackle the crisis are already being overwhelmed by 
process, citing the multiple forums and task teams, of which the 
National Electricity Response Team is only one.  (Business Day, 
Engineering News. April 24, 2008) 
--------------------------- 
Beware Sarkozy's Cozy Deals 
--------------------------- 
¶9. (U) Two Noseweek editorials took a negative stance towards Areva 
and France, claiming the country is often seen as using Africa as a 
dumping ground for nuclear waste and that France is not viewed 
positively by the African Union as a result of its colonial history 
in Africa.  Areva and Westinghouse are short-listed for tenders for 
up to 20,000 MW and an estimated $70-80 billion for new build 
nuclear power stations over the next twenty years.  The articles 
cited alleged bribes to Areva officials related to other 
transactions and European involvement in corruption related to arms 
deals in South Africa.  The articles noted that South Africa is a 
founding member of the African Union and signatory to the New 
Economic Partnership for African Development (NEPAD) which oblige 
the SAG to ban deals with companies convicted of or incriminated by 
corruption.  (Noseweek investigative magazine, April, 2008) 
------------------------------------------ 
Gauteng's Digital Dream Project Criticized 
------------------------------------------ 
 
¶10. (U) IT companies criticized Gauteng provincial government's 
plans to build Gauteng Link, a province-wide telecommunications 
network, at a cost of up to R35 billion ($4.5 billion).  The project 
requires the approval of the national cabinet and is expected to be 
completed by 2010.  The intention is to build a high-capacity 
network to bridge the "digital divide", reduce communication costs 
(especially for broadband access), and give citizens access to an 
Q(especially for broadband access), and give citizens access to an 
array of online government services.  The project involves big 
investments by the provincial government and municipalities, but 
will also rely on the support of the private sector.  However, the 
undertaking is already coming under fire from the private sector, 
with one telecom industry executive labeling it a "waste of money". 
Gauteng wants to spend more on this project than Telkom rival Neotel 
will spend in the next decade on its entire national network 
deployment.  Sources in the private sector question whether the 
project will get off the ground.  They indicated that the National 
Treasury would block funding in the same way it has questioned other 
planned telecom investments by state-owned companies Sentech and 
Broadband InfraCo.  Gauteng Shared Service Center Chief Information 
Officer Lemmy Chappie said Gauteng Link will be run as a 
public-private partnership.  Gauteng's three biggest municipalities 
have thousands of kilometers of fiber-optic cable in the ground, but 
infrastructure is barely developed in outlying areas.  Chappie said 
Gauteng Link plans to bridge gaps in existing infrastructure and 
extend the network to lesser-served parts of the province since 
commercial telecom operators such as Telkom have shown an 
unwillingness to provide services in economically depressed areas. 
The press described the funding plan as sketchy, but noted that the 
government may raise debt to build the network.  Access to the 
network will be subsidized for consumers but it won't be free.  A 
special investment vehicle, the Gauteng Fund, will be used to 
finance the network.  The provincial government has already 
 
PRETORIA 00000881  004.2 OF 004 
 
 
contributed R500 million ($65 million).  The fund is expected to 
grow rapidly if the cabinet approves the project.  Chappie said, 
"The distribution network will be operated by different companies 
that will provide last-mile services to citizens, creating jobs and 
ensuring the economy grows."  Chappie also hoped to work closely 
with Sentech, which is preparing SA for the switch from analogue to 
digital terrestrial broadcasting.  Chappie said consumers could use 
the digital decoders required for digital TV viewing to also receive 
Internet signals, thereby turning people's TV sets into Internet 
terminals.  In an environment where many people can not afford a 
computer, he thought this would be a good way to get people hooked 
up to the Internet.  (Financial Mail, April 11, 2008) 
 
------------------------------- 
HP Predicts Exploding IT Growth 
------------------------------- 
 
¶11. (U) Hewlett-Packard said it saw Africa as one of its 
fastest-growing markets, expecting the world's poorest continent to 
rival India for IT outsourcing within a decade.  Hewlett-Packard 
Africa Managing Director Rainer Koch told Reuters its sales on the 
continent were rising 25% per year.  He expected that pace to 
continue regardless of any economic downturn in developed economies, 
with growth in the sector likely outpacing that in India, albeit 
from a lower base.  "Because of outsourcing, salaries in India are 
skyrocketing so I think you will see people recruiting in Africa 
accordingly.  Koch thought Africa would be competing with India in 
10 years.  He said key to new growth in Africa was the colossal 
growth in mobile phone usage since 2000, revolutionizing access to 
communication and ease of business at the same time as a commodity 
price boom benefited a string of countries.  Koch said the firm 
currently employed around 1,000 people across Africa including 
outsourcing centers, with local partner firms employing several 
thousand more -- but that could increase by 20 to 30% in the next 
few years.  (Engineering News, April 22, 2008) 
 
 
BOST