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UNCLAS SECTION 01 OF 04 PRETORIA 000918 
 
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TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
PGOV, SF 
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER APRIL 30, 2008 
ISSUE 
 
PRETORIA 00000918  001.2 OF 004 
 
 
¶1. (U) Summary.  This is Volume 8, issue 18 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- Mboweni Warns on Inflation 
- Prices Start to Slip as Property Boom Ends 
- Government Infrastructure Spending        Expected to Drive Growth 
 
- Transnet's Big Spending Plans 
- Transnet Pipeline Project 
- Load-Shedding Backfires on Eskom 
- Regulator Grants Extensions, but Sticks with May 23  Hearing Date 
for Price Increase 
- SA Power, Safety Problems Reverse Six Years of Platinum  Growth 
- Nationwide Halts Operations 
End Summary. 
 
-------------------------- 
Mboweni Warns on Inflation 
-------------------------- 
¶2. (U) South African Reserve Bank (SARB) Governor Tito Mboweni said 
high food and fuel costs have spilled over into second round 
inflationary effects that have to be tackled.  He also warned in an 
interview with CNBC Africa that an excessive increase in electricity 
prices will have serious consequences for inflation. The targeted 
CPIX inflation gauge jumped to a five-year high of 10.1% y/y in 
March, raising speculation that interest rates may have to rise 
again.  The SARB hiked its repo rate by 50 basis points to 11.5% on 
April 10, adding to eight half percentage point increases since June 
¶2006.  Mboweni said high international food and oil prices had been 
the spark for higher inflation, but pressures were now more 
widespread. "Food and oil have been the original sins, but the 
impact of the increases in the prices of food and oil has now 
spilled over into the other categories of the inflation basket, 
second round effects.  The Reserve Bank has to try to ensure that 
these second round effects don't get out of control," Mboweni said. 
Consumer demand needed to be dampened further and inflation 
expectations, which rose sharply in the first quarter of 2008, had 
to be contained, he said.  Some analysts have warned that further 
rate hikes could damage the economy, with consumers already battling 
with high prices and interest rates and a severe electricity crisis. 
 The power shortage is widely expected to crimp growth this year, 
and a request from power utility Eskom for a 60% nominal tariff 
increase to help fund a boost in capacity will add to pressures. 
Mboweni said other ways should be found to fund Eskom's capital 
expenditure program.  Electricity tariff hikes together with wage 
settlements, were issues that the Monetary Policy Committee (MPC) 
would monitor closely, he said.  The National Energy Regulator of 
South Africa (NERSA) will decide on the Eskom request in early June, 
before the next scheduled MPC meeting.  However, Mboweni said the 
MPC did not have to wait for set meetings to make changes to its 
monetary stance.  (Business Day, April 29, 2008 and Engineering 
News, April 29, 2008) 
 
------------------------------------------ 
Prices Start to Slip as Property Boom Ends 
------------------------------------------ 
¶3. (U) After years of an unprecedented property boom, South Africa's 
property market has begun to decline as consumers fell victim to 
high interest rates and soaring inflation.  Standard Bank's monthly 
property gauge for March showed the first decline in year-on-year 
Qproperty gauge for March showed the first decline in year-on-year 
prices in almost eight years.  In 2004, three years after the start 
of the boom, price growth reached a high of nearly 40%.  ABSA Bank 
sees prices falling 7% this year.  "We expect the industry to record 
lower levels of activity and prices to decline towards the end of 
the year," said ABSA Property Analyst Jacques du Toit.  "Higher 
interest rates combined with the National Credit Act, with its 
stricter laws, have definitely had a negative impact," he said. 
Property market weakness is not just the result of the financial 
constraints on the industry, but people are increasingly gloomy and 
consumer confidence is at its lowest level in four years.  "There is 
some nervousness about the political transition and crime and power 
utility Eskom.  So if you add all those factors, people aren't very 
hopeful and the property industry has slowed down considerably this 
year as a result," du Toit said.  Violent crime rates remain high, 
while a crippling electricity shortage is seen as threatening 
growth.  The rise of Jacob Zuma to the presidency of the ruling ANC, 
with strong backing from unions and communists, has increased 
worries about whether the new leadership will ditch the prudent 
 
PRETORIA 00000918  002.2 OF 004 
 
 
economic policies that have spurred strong economic growth. 
Analysts say the property market may only start recovering when 
interest rates change direction.  (Business Day, April 29, 2008) 
----------------------------------- 
Government Infrastructure Spending        Expected to Drive Growth 
----------------------------------- 
¶4. (U) Deputy President Phumzile Mlambo-Ngcuka said the SAG's 
unprecedented R600 billion ($80 billion) public-investment program 
would continue to provide growth impetus.  "South Africa is now a 
construction site," she quipped.  The Presidency's Deputy Policy 
Head Alan Hirsch argued that South Africa could still attain its 
target of 6% growth from 2010, despite the "serious power 
emergency".  Speaking at a media briefing following the release of 
the 2007 annual report for the Accelerated and Share Growth 
Initiative for South Africa (ASGISA), Hirsch said the power crisis 
was not a "fundamental impediment" to the attainment of the 
program's stated growth aspirations.  ASGISA sought average growth 
rates of 4% from 2006 to 2010, to be followed by an average of 6% 
from 2010 to 2014.  Infrastructure was also the overarching theme of 
the annual report itself, occupying 30 of its 70 pages.  Crucially, 
it showed that there was a growing capacity to deliver on 
infrastructure projects, even at municipal levels.  Investment 
spending by national departments rose 30% in 2006/7 and by 13% for 
the first two quarters of 2007/8 and there were now some 22,000 
investment projects being monitored under the so-called national 
infrastructure project register, covering everything from bridges 
and municipal roads to schools and hospitals.  However, 
Mlambo-Ngcuka stressed that creative linkages had to be found to 
sustain work opportunities for those currently occupied in the 
infrastructure projects once they were completed, and called for 
greater cooperation between the public and private sectors to 
address the challenge.  Hirsch said that, in spite of the 
anticipation that the economy would slow down in 2008, there was no 
immediate reason for the government to change its target of halving 
poverty and unemployment by 2014.  (Business Report, April 25, 2008 
and Engineering News, April 24, 2008) 
----------------------------- 
Transnet's Big Spending Plans 
----------------------------- 
¶5. (U) Government-owned freight and logistics group Transnet 
announced plans to spend R80.3 billion ($10.7 billion) in the next 
five-years on capacity expansion.  About half of the capital 
expenditure program will be funded from Transnet's own reserves, but 
R37 billion ($4.9 billion) will be borrowed.  Transnet CEO Maria 
Ramos said Transnet's borrowing would not exceed 50% of its capital. 
 The Freight Rail division will receive R38 billion ($5 billion), 
the National Port Authority will receive R16 billion ($2.1 billion), 
the Pipeline division will receive R11.9 billion (1.6 billion), and 
R9.6 billion ($1.3 billion) will be spent on Transnet Port 
Terminals.  Plans in the rail division include modernizing 
Transnet's fleet by upgrading 200 locomotives and purchasing 50 new 
locomotives.  Port expansion plans include R1 billion ($133 million) 
Qlocomotives.  Port expansion plans include R1 billion ($133 million) 
to widen and deepen the entrance to Durban harbor and resurface 
Durban Pier One.  An amount of R622 million ($83 million) is 
earmarked for the new Port of Ngqura and its container terminal. 
Ramos warned that power cuts were affecting Transnet's expansion 
projects.  "We are from time to time affected by the power issues - 
like everybody else - and we are committed to deal with the savings 
we have been asked to work with Eskom on."  (Business Times, April 
24, 2008 and Engineering News April 23, 2008) 
------------------------- 
Transnet Pipeline Project 
------------------------- 
 
¶6. (U) Transnet CEO Maria Ramos announced that Transnet would begin 
construction of the urgently needed R11.2 billion ($1.5 billion) 
multi-product fuel pipeline from Durban to southern Johannesburg in 
August, and was confident of completing the project by September 
¶2010.  Ramos acknowledged that mitigation strategies would have to 
be implemented to keep South Africa 'wet', owing to the fact that 
growing demand was having to be increasingly supplemented by 
imports.  The new infrastructure would also not be completed in time 
for the start of the FIFA 2010 World Cup and when fuel demand was 
expected to peak.  News of a firm construction schedule for the 
pipeline also came amidst growing supply security fears, 
particularly in light of the fast-rising demand for diesel, which 
was not only finding its way into South Africa's growing 
diesel-vehicle fleet, but also into power generators.  Generator 
units were being deployed particularly as a safeguard against 
 
PRETORIA 00000918  003.2 OF 004 
 
 
business losses associated with the prevailing power shortages. 
South African diesel demand totaled 9.7 billion liters in 2007, 
compared with 8.7 billion liters in 2006.  Ramos reported that the 
front-end engineering design for the pipeline had been completed and 
the environmental approvals were expected imminently, which would 
open the way for the construction.  Ramos stressed that Transnet 
Pipelines had been working with the liquid-fuel industry, as well as 
the Department of Minerals and Energy, on a "range of mitigating 
strategies" for the interim period while the pipelines were being 
built.  One of these remedies included the introduction of 
drag-reducing agents to improve the efficiency of the existing 
pipeline network, which was already operating at full capacity. 
Also being interrogated were rail-based transportation solutions, 
including the purchase of specialized wagons to move fuel inland. 
(Engineering News, April 23, 2008) 
 
-------------------------------- 
Load-Shedding Backfires on Eskom 
-------------------------------- 
¶7. (U) Electricity experts have warned Eskom that its load-shedding 
strategy is back-firing, destroying electricity infrastructure and 
plunging communities into extended periods without power.  The 
government has insisted that load-shedding - as the best strategy to 
conserve power - will continue, despite a lull over the current 
South African holiday period.   At least two sub-stations, in Port 
Elizabeth and Kempton Park, exploded because of load-shedding last 
week.  Experts warned that the ageing infrastructure of the 
country's sub-stations was not coping with load-shedding, and that 
to continue will cause worsening problems.  Last week, Cape Town 
called on Eskom to implement different energy-saving methods, 
arguing that load-shedding was not yielding the desired results. 
Cape Town technicians asserted that - instead of saving the required 
10% on electricity usage - load shedding was having the opposite 
effect: where businesses and residents increased their electricity 
usage during those times when electricity was available, thereby 
adding to the pressure on the power grid and infrastructure.  (The 
Sunday Independent, April 27, 2008) 
------------------------------------------ 
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 
Qweek 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) 
--------------------------------------------- ------ 
Regulator Grants Extensions, but Sticks with May 23   Hearing Date 
for Price Increase 
--------------------------------------------- ------ 
¶9. (U) The National Energy Regulator of South Africa (NERSA) has 
granted the National Economic Development and Labor Council (NEDLAC) 
and Business Unity South Africa (BUSA) an extension until May 20 to 
submit written submissions on Eskom's application for a 60% nominal 
increase for the 2008/9 financial period.  But, the April 29 
deadline still held for other written submissions, as NERSA had not 
received any other requests for additional time.  NERSA announced 
that the May 23 date should be retained for the actual public 
hearing, given that it was felt that Eskom's application should be 
given urgency in light of the prevailing electricity crisis.  The 
determination of the tariff is expected on June 6.  NERSA has not 
 
PRETORIA 00000918  004.2 OF 004 
 
 
discussed the implications of a call made by the ANC National 
Working Committee, supported by both NEDLAC and BUSA, to have a 
proposed national electricity summit ahead of the public hearings. 
Eskom CEO Jacob Maroga had welcomed the summit proposal, saying 
there was a definite need for a "national conversation" both on the 
handling of the crisis, as well as on the utility's application for 
a tariff increase.  (Engineering News, April 25, 2008) 
------------------------------------------- 
SA Power, Safety Problems Reverse Six Years      of Platinum Growth 
-------------------------------------------- 
 
¶10. (U) SA platinum production declined by over 200,000 ounces, 
after global mine output declined, and with little chance of a 
material recovery in 2008, global precious metals consultancy GFMS 
announced last week.  GFMS said there was a great risk that this 
year's output might fail to match even last year's "disappointing 
result".  Global platinum production in 2007 dropped by 6 percent, 
and South Africa's by 13%, from 2006 levels.  GFMS said the volatile 
platinum price could trade between $1,700/oz and $2,400/oz this year 
(currently $1,961).  Platinum production from South Africa - which 
accounts for 75 percent of global production - "stumbled badly, as 
six years of uninterrupted growth were thrown into reverse", 
according to GFMS.  The decline was caused by a renewed 
"zero-tolerance approach" to mine site fatalities, a shortage of 
skilled personnel, and industrial action over wages and employee 
safety.  Guaranteed power to mines was stopped for five days in 
January, but has been restored to 90%, and 95 percent% in some 
cases.  However, there was uncertainty over the effects of this on 
production levels for 2008, with expansion projects also in play. 
(Engineering News, April 24, 2008) 
 
--------------------------- 
Nationwide Halts Operations 
--------------------------- 
 
¶11. (U) Domestic airline Nationwide has shut-down service without 
warning as a result of soaring oil prices and the collapse of a 
black economic empowerment (BEE) deal under which the African 
General Equity Group (AGE) was expected to take over 51% of the 
airline.  Nationwide Executive Chairman Vernon Bricknell said, "cash 
flow has become critical and we have decided to voluntarily cease 
all flight operations until further notice."  Nationwide's troubles 
began when an engine fell off one of its Boeing-737 on take-off from 
Cape Town in November 2007.  It was cleared of fault by a Civil 
Aviation Authority (CAA) audit, but Nationwide was grounded at the 
start of the Christmas holiday season because the CAA was 
dissatisfied with its record keeping on the origin of components. 
It was allowed to resume flying only when its aircraft had been 
inspected by competitor Safair.  Bricknell said Nationwide's 
business had gradually recovered from the effects of the grounding. 
However, in March and April, "we faced a 30% increase in fuel costs 
combined with a decrease in passenger load factors".  The closure of 
Nationwide took the Department of Transport by surprise.  (Business 
Report, April 30, 2008) 
 
 
 
BOST