VZCZCXRO7617
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #1056/01 1401320
ZNR UUUUU ZZH
R 191320Z MAY 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 4491
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

UNCLAS SECTION 01 OF 05 PRETORIA 001056 
 
CIMS NTDB WASHDC 
DEPT OF COMMERCE WASHDC 
DEPT OF TREASURY WASHDC 
AMCONSUL JOHANNESBURG 
AMCONSUL CAPE TOWN 
AMCONSUL DURBAN 
 
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 MAY 16, 2008 
ISSUE 
 
 
¶1. (U) Summary.  This is Volume 8, issue 20 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- Mboweni Favors Further Rate Hike 
- International Groups Believes SA Cannot Grow Faster   Than 3.5% 
- Commodity Prices to Drive Growth 
- House Prices to fall in Real Terms 
- Net Reserves Down on Lower Gold Price 
- SAA Restructuring Program on Track, but Profit-Margins  Shrink as 
Fuel Prices Rise 
- SAA to Realign Its Fleet to Include More Fuel-efficient 
Aircrafts 
- SAG Unveils New Power Pricing Policy 
- Eskom Price Hike Unlikely to Go Through 
- Eskom Takes Steps to Finalize Nuclear Power Supplier  Selection 
Process 
- Treasury Concedes on Mining Royalties 
- Interest Grows in MTN Acquisition 
- HP Acquires SA IT Services Company 
- Durban Hosts Africa's Largest Travel Trade Show 
End Summary. 
 
-------------------------------- 
Mboweni Favors Further Rate Hike 
-------------------------------- 
¶2. (U) South African Reserve Bank (SARB) Governor Tito Mboweni sent 
a clear message that interest rates will rise again at the next 
Monetary Policy Committee (MPC) meeting in June, stating that price 
pressures have spread well beyond food and fuel and must be 
contained.  "We can't say that the inflation problem we are facing 
is just because of food and energy, it's more generalized," he 
announced after the SARB published a twice-yearly monetary policy 
review.  When the MPC started raising interest rates in June 2006, 
the main concern was the effect of high domestic demand on 
inflation, the SARB report said.  But now the inflation landscape 
was dominated by "a succession of supply-side shocks", which include 
a weaker rand and the likelihood of steep electricity price hikes, 
which the SARB now sees as South Africa's main inflation threat. 
Mboweni emphasized the importance of anchoring inflation 
expectations, which have deteriorated significantly this year. 
Interest rates have already increased by a cumulative 4.5 percentage 
points since June 2006, taking prime lending rates up to 15% and 
curbing consumer demand, the economy's main engine of growth. 
Mboweni dismissed suggestions that South Africa's inflation 
targeting policy was not working, although the annual rise in the 
CPIX price gauge has exceeded its 3%-6% official target for a full 
year, rising by a five-year peak of 10.1% last month. "Any central 
bank worth its salt will want to contain inflation at lower levels 
... I promise you we are going to do our job, come hell or high 
water", he said.  Mboweni said that monetary policy had become 
"particularly challenging" for all inflation targeting countries 
with many exceeding targets due to the effect of soaring global food 
and fuel prices.  At its policy meeting last month, the MPC said 
inflation was expected to peak at an average 9.3% in the first 
quarter of this year and return to its target only by the end of 
next year.  (Business Day, May 15, 2008) 
 
--------------------------------------------- ------ 
International Groups Believes SA Cannot Grow Faster    Than 3.5% 
--------------------------------------------- ------ 
¶3. (U) A Harvard-led group of international experts said, in final 
recommendations released by the National Treasury, South Africa's 
rapid pace of economic growth over the past three years was well 
Qrapid pace of economic growth over the past three years was well 
above a sustainable "potential" growth level of about 3.5%.  This is 
well below the South African Reserve Bank (SARB)'s sustainable 
growth estimate of 4.5%.  The Harvard group said South Africa's pace 
of growth, which amounted to about 5% during each of the past three 
years, was unsustainable as it was driven by domestic demand.  To 
achieve an official goal of boosting growth to a sustainable annual 
rate of 6% by the start of the next decade, South Africa should 
focus on creating jobs that boosted exports.  The group said the 
biggest constraint to growth was that only 42.6% of South Africa's 
working-age population was employed, compared with 65% in comparable 
countries.  The group urged the SAG to stick to its conservative 
fiscal policies and inflation targeting, which has come under fire 
as soaring food and fuel prices force the SARB to continue raising 
interest rates.  The group also suggested that the SARB control 
currency volatility, which has been cited as a big impediment to 
 
PRETORIA 00001056  002 OF 005 
 
 
growth.  The panel did not recommend a specific level for the rand, 
which has depreciated by 13% against major currencies this year. 
Growth is expected to slow to well below 4% this year.  (Business 
Day, May 9, 2008) 
-------------------------------- 
Commodity Prices to Drive Growth 
-------------------------------- 
¶4. (U) Finance Minister Trevor Manuel stated that the prices of 
commodities such as gold and platinum will remain at near record 
levels, fueling overall economic growth in Africa.  "There is 
nothing to suggest that they [prices] will come off in the short to 
medium-term," Manuel said during an interview in Maputo, Mozambique, 
where he was attending the annual meeting of the African Development 
Bank.  "The demand for metals and mineral commodities will remain 
strong."  Manuel also said that investment into countries such as 
South Africa, Zambia, and other metals producers has picked up as 
metal prices have climbed to new heights, driven by demand from 
China and India.  (Business Day, May 14, 2008) 
---------------------------------- 
House Prices to fall in Real Terms 
---------------------------------- 
¶5. (U) According to the latest ABSA house price index, house price 
growth slowed to 6.8% y/y in nominal terms in April, the lowest in 
eight and a half years.  ABSA Home Loans Senior Property Analyst 
Jacques du Toit said that further price drops were expected in real 
terms and while some price growth in nominal terms was still 
expected this year, this would be at much lower levels towards the 
end of the year. "Currently we are looking at an overall drop in 
real terms of just over 4% in 2008.  In nominal terms, growth of 
between 5% and 6% is expected for this year," said Du Toit.  He said 
higher interest rates were driving real prices down, and that 
households were also coming under increasing pressure from sharply 
rising food and fuel prices.  Du Toit expects the property cycle to 
bottom out in 2009 after which there will be a gradual recovery when 
interest rates start to drop.  (Business Day, May 11, 2008) 
------------------------------------- 
Net Reserves Down on Lower Gold Price 
------------------------------------- 
 
¶6. (U) The South African Reserve Bank announced that net gold and 
foreign exchange reserves fell from $33.1 billion in March to $33.0 
billion in April, the first decline in almost two years.  The 
decline was mainly a result of a lower gold revaluation, which 
subtracted $261 million from the reserves as the gold revaluation 
price fell from $937 per ounce in March to $872 per ounce in April. 
The SARB has said it will continue to build reserves to help cushion 
the country against external shocks, particularly with the current 
account deficit at 7.3% of GDP in 2007.  The SARB brought a 
long-standing negative position in reserves into balance early in 
2004 with the elimination of its loss-making forward foreign 
exchange book, historically the Achilles' heel of the currency. 
However, South Africa's foreign exchange still lags holdings in 
other emerging economies.  (Business Day, May 11, 2008) 
 
-------------------------------------------- 
SAA Restructuring Program on Track, but      Profit-Margins Shrink 
as Fuel Prices Rise 
--------------------------------------------- 
¶7. (U) South African Airways (SAA) CEO Khaya Ngqula, announced that 
Q7. (U) South African Airways (SAA) CEO Khaya Ngqula, announced that 
the airline is still on track to meet the objectives set out in its 
restructuring plan initiated in 2007, but it was possible that a 
projected 7.5% profit margin would not be reached by the end of 
2009, due to soaring oil prices.  The upward movement of oil prices 
during its 2007/8 financial year wiped R950 million ($125 million) 
off the airline's bottom-line.  However, Ngqula stressed that SAA's 
financial position had improved through fleet downsizing.  SAA has 
also implemented aggressive oil and currency hedging programs to 
mitigate the risk for 2008/9.  CFO Kaushik Patel indicated that it 
was now working on a 3% to 6% margin range, which would be heavily 
dependent on fluctuations in the rand/dollar exchange rate as well 
as the oil price.  Initial planning had been done at an oil price of 
$84 per barrel for 2008/9, but SAA was now working with scenarios 
between $84 and $150 per barrel.  SAA is considering the use of fuel 
surcharges to offset rising oil prices, but Ngqula indicated that it 
would not be in a position to pass through the full costs of rising 
fuel prices.  A R6 million ($800,000) incentive scheme, designed to 
retain highly skilled staff, had also received board approval. 
During the past year, 963 SAA employees took voluntary retrenchment 
packages and a further 869 resigned, making forced retrenchments 
 
PRETORIA 00001056  003 OF 005 
 
 
unnecessary.  Ngqula admitted that many skilled employees had left 
its employ, and the exodus had taken a particular toll on SAA 
Technical (SAAT), its maintenance unit.  SAAT is in the process of 
appointing 100 replacements, including 23 technicians recruited from 
bankrupt competitor Nationwide, and that it would continue to 
recruit.  He said SAA continued to 'unbundle' its business into its 
seven distinct components, a process that should be finalized by 
midyear.  A recent FAA audit of SAAT that was leaked to the local 
press expressed concern over SAAT's loss of technical personnel, 
noting that if SAAT continued to lose personnel at the current pace, 
it would not be able to adequately provide maintenance for SAA and 
the other international airlines that it serves.  (Business Report, 
May 13, 2008) 
---------------------------------------- 
SAA to Realign Its Fleet to Include More      Fuel-efficient 
Aircrafts 
---------------------------------------- 
¶8. (U) South African Airways (SAA) issued a request for information 
(RFI) to Airbus and Boeing to form part of a new fleet plan.  Fuel 
efficiency would underpin the RFI for the "next-generation" fleet, 
which would be introduced from 2014, as well as the "bridging 
fleet", to be operated between 2010 and 2014.  According to the 
press announcement, a formal request for proposals (RFP) would be 
compiled on information garnered from the RFIs.  SAA is expected to 
then outline the number of aircraft sought, as well as the purchase 
and funding scenarios, which are likely to involve a mix of outright 
aircraft purchases and leasing arrangements.  SAA could seek to 
initiate a competitive bidding process between Boeing and Airbus 
later this year, probably built around Boeing's B-787 series and 
Airbus' A350s.  These planes are viewed as considerably more energy 
efficient than the current operational fleet.  According to press 
reports, SAA might also consider the purchase of an Airbus A-380 
super carrier.  In the meantime, SAA issued a firm RFP to aircraft 
manufacturers and leasing organizations for six aircraft to join its 
current Airbus-dominated fleet during the course of 2008/9.  Three 
of these would need to be wide-bodied aircraft for international and 
long-haul African routes, while the balance would comprise 
narrow-bodied planes to service domestic and regional capacity.  CEO 
Khaya Ngqula said that SAA's restructuring plan had created the 
financial platform for growth and that SAA was now poised to add 
capacity to 11 existing routes and add a brand-new service to Maun, 
Botswana, in the coming months.  Business Development Head Jason 
Krause explained the airline would add capacity to the Cape Town, 
Luanda, Dar es Salaam, Entebbe, Victoria Falls, Mauritius, Mumbai, 
Frankfurt, Munich, Perth and Sao Paulo routes in the immediate-term 
and that the six leased aircraft would be crucial to achieving this 
goal.  Last year, SAA grounded its fleet of six Boeing 747-400s. 
Three of these aircraft were returned to the leasing entities, one 
had been sub-leased to TAAG of Angola, and the last two would also 
be subleased.  Krause said the RFP for the additional six aircraft 
incorporated SAA's desire for fleet simplification in the 
immediate-term, which implied that it would seek to add additional 
Airbus capacity.  (Engineering New, May 13, 2008) 
QAirbus capacity.  (Engineering New, May 13, 2008) 
------------------------------------ 
SAG Unveils New Power Pricing Policy 
------------------------------------ 
¶9. (U) A new electricity pricing policy was approved by Cabinet this 
week, details of which were announced on May 16 at the national 
stakeholder summit on electricity.  The summit focused primarily on 
Eskom's request for a 60% tariff hike for the 2008/9 determination 
period, as well as South Africa's future pricing policy. 
"Preliminary discussions between government and all the key 
stakeholders were taking place to ensure that consensus is reached 
at the summit," Government Spokesperson Themba Maseko said following 
Cabinet's meeting.  Cabinet endorsed a "smoothing mechanism" for 
tariffs.  It is now unlikely that the National Energy Regulator of 
South Africa, which is scheduled to hold public hearings into 
Eskom's application on May 23 and make a determination on June 6, 
would approve the full 60% nominal increase requested.  A Cabinet 
statement said the policy sought to ensure that the electricity 
value chain: 
* contributed to economic growth; 
* provided universal access to electricity; 
* created an investor-friendly pricing structure, which promotes 
efficient cost recovery measures and a reasonable return on 
investment; 
* guaranteed an environmentally friendly usage of resources; 
* provided an open and nondiscriminatory access to the transmission 
system; and 
 
PRETORIA 00001056  004 OF 005 
 
 
* created greater levels of transparency on electricity prices to 
the users. 
The Cabinet statement made no reference, however, to a possible 
increase in the size of the shareholder injection that might be 
required to sustain Eskom's financial ratios and its credit rating 
in view of the lower-than-requested tariff increases.  (Engineering 
News, May 15, 2008) 
--------------------------------------- 
Eskom Price Hike Unlikely to Go Through 
--------------------------------------- 
 
¶10. (U) Business and labor groups called for the creation of a 
multi-stakeholder group to debate the funding options for 
State-owned power utility Eskom's R343 billion ($46 billion) 
expansion projects.  Speaking at the National Energy Summit on May 
16, Congress of South Africa Trade Unions (COSATU) General Secretary 
Zwelinzima Vavi said that a five-to-ten person committee should meet 
to thrash out the "best possible solution" in the context of the 
current emergency.  The summit was called for after rolling power 
cuts plagued the country and state power company Eskom requested a 
60% nominal tariff increase.  Eskom's request to augment the 14.2% 
hike it had been granted in 2007 has unleashed a wave of opposition. 
 Vavi did not discount the need to raise prices to deal with the 
funding challenge, but suggested that the state funding role should 
be properly debated.  Business Unity South Africa Chairperson Bobby 
Godsell acknowledged that the crisis was primarily of government's 
making, but said it would be unhelpful simply to seek scapegoats. 
Instead, he said lessons should be learned from the failure of all 
participants to deliver on the 1998 White Paper, which warned that 
SA would run short of power in 2007.  He called for both an 
immediate-term focus, to overcome the upcoming winter, and a 
medium-term focus, which dealt with the pricing architecture.  Vavi 
also rejected any notion that workers and the poor should bear the 
brunt of the pain for "other people's mistakes".  He also lambasted 
the unilateral actions taken by Eskom to cut power to the mines and 
factories, saying such unilateralism on the issue of rationing 
should never be allowed to take place again.  Minister of Minerals 
and Energy, Buyelwa Sonjica attended the summit along with other 
senior government officials.  Eskom appears to have lost support 
even from the government in its plea for an immediate and drastic 
hike in electricity tariffs.  Instead, the government has shifted 
towards supporting a cash injection for the utility to permit five 
years of smaller, incremental hikes.  The emerging consensus between 
the SAG, business, labor and the African National Congress and its 
allies is that a sudden price shock would deliver irreparable harm 
to the economy and add significantly to inflation and interest rate 
concerns.  (Engineering News, May 16, 2008 and Business Day, May 16, 
2008) 
 
------------------------------------------- 
Eskom Takes Steps to Finalize Nuclear Power    Supplier Selection 
Process 
------------------------------------------- 
 
¶11. (U) State electricity utility Eskom requested Best and Final 
Offers from Westinghouse and Areva.  The two companies have bid to 
build a fleet of power plants in South Africa supplying up to 20,000 
megawatts of power.  The Westinghouse N-Powerment Team submitted a 
Qmegawatts of power.  The Westinghouse N-Powerment Team submitted a 
proposal in response to the Eskom request.  Eskom is expected to 
review the Westinghouse and Areva offers over the next few weeks, 
and make a recommendation to its Board in June to select to a single 
supplier.  The next steps include the development of an Early Works 
contract so the successful supplier can begin ordering materials. 
 
------------------------------------- 
Treasury Concedes on Mining Royalties 
------------------------------------- 
 
¶12. (U) National Treasury has made major concessions on mining 
royalties to accommodate the mining industry's fear of being 
overtaxed under a new royalty regime.  Cabinet-approved amendments 
to the Mineral and Petroleum Resources Royalty Bill will introduce a 
distinction between the royalties imposed on refined minerals (such 
as gold) and unrefined minerals (including diamonds, gas and oil), 
which will have their own formulas.  The amendments also lower the 
base for calculating the tax.  Chamber of Mines Chief Economist 
Roger Baxter said that National Treasury had not yet discussed the 
amendments with the Chamber, so he could not give a definitive 
comment, but the Chamber appreciated the Treasury's willingness to 
 
PRETORIA 00001056  005 OF 005 
 
 
engage on the issues.  (Business Day, May 14, 2008.) 
 
--------------------------------- 
Interest Grows in MTN Acquisition 
--------------------------------- 
 
¶13. (U) India's leading mobile operator Bharti Airtel has contacted 
Middle Eastern sovereign wealth funds in a search for additional 
cash to back a bid for a majority stake in South Africa's MTN Group, 
according to press reports.  Bharti, which said it was in talks with 
MTN but had not made any bid yet, was reported to be considering 
offering R160-165 ($21-22) a share for a 51% stake in MTN that would 
cost $19 billion.  A combination of Bharti and MTN would create the 
world's sixth-biggest mobile firm with around 130 million 
subscribers.  Singapore Telecommunications, Bharti's largest 
shareholder with more than a 30% stake, is actively involved in the 
talks between Bharti and MTN.  Emirates Telecommunications 
(Etisalat) said it was also looking at MTN as a possible acquisition 
target as part of Africa expansion plans.  (Engineering News, May 
13, 2008) 
 
---------------------------------- 
HP Acquires SA IT Services Company 
---------------------------------- 
 
¶14. (U) Hewlett-Packard's (HP) imminent $13.9 billion takeover of 
Electronic Data Systems (EDS) is expected to strengthen both 
companies' operations in the South African technology services 
market, which is dominated by local entities such as arivia.kom, 
Business Connexion and Gijima Ast.  HP recently entered the South 
African IT services market.  EDS generated an estimated revenue of 
more than R400 million ($53 million) in 2007.  Frost & Sullivan 
Technology Analyst Lindsey McDonald said EDS had seen steady growth 
and was "very well respected" within the industry for its expertise 
in storage techniques.  (Business Report, May 15, 2008) 
 
--------------------------------------------- -- 
Durban Hosts Africa's Largest Travel Trade Show 
--------------------------------------------- -- 
 
¶15. (U) Thousands of visitors traveled to KwaZulu-Natal (KZN) for 
the 2008 Tourism Indaba, Africa's biggest travel trade show.  The 
Indaba took place at the Durban International Convention Center May 
10-13.  Deputy Minister of the Department of Environmental Affairs 
and Tourism Rejoice Mabudafhasi announced at the opening session 
that South Africa was on track to receive 10 million tourists per 
year by 2010.  The 2008 Tourism Indaba attracted 1,850 exhibiting 
companies and over 15,000 delegates from more than 80 countries. 
This marked a 14 percent growth in the number of delegates from 
¶2007.  The growth in the number of delegates this year provided a 
boost for the regional economy as delegates participated in city 
tours and add-on events throughout the province. The Indaba focused 
on leveraging tourism growth opportunities presented by the 2010 
FIFA World Cup.  (Tourism Indaba Daily News, May 10-13, 2008) 
 
 
BALL