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UNCLAS SECTION 01 OF 05 PRETORIA 001146 
 
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 
 
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TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
PGOV, SF 
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER MAY 30, 2008 
ISSUE 
 
 
PRETORIA 00001146  001.2 OF 005 
 
 
¶1. (U) Summary.  This is Volume 8, issue 22 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- Economic Growth Slows 
- Large Rate Hike Looms as Inflation Hits 10.4% 
- 2000 Foreign Math and Science Teachers Head for SA 
- SAA Reaches Salary Agreement with Pilots 
- PetroSA Mulls Challenge to Transnet Pipeline 
- Power Tariff Smoothing Prevailing 
- Xenophobia Affects Mine Production 
- Union Calls for Nationalization of Mines 
- Indian Company Considers MTN Merger 
- ICASA Rejects Bid to Force Pay-TV Providers to Pay    for Public 
Broadcaster's Content 
- Cape Town Builds Five-Star "Dry" Hotel 
- Xenophobia Impacts Provincial Tourism 
End Summary. 
--------------------- 
Economic Growth Slows 
--------------------- 
¶2. (U) Statistics South Africa (StatsSA) reported that growth in 
gross domestic product (GDP) slowed from 5.3% in the fourth quarter 
of 2007 to 2.1% in the first quarter of 2008, below forecasts of 
2.4%.  Mining output, which makes up 5.4% of GDP, decreased 22.1% 
compared with the final quarter of 2007, its sharpest fall in four 
decades.  Manufacturing output, which accounts for more than 16% of 
GDP, dipped 1%.  The electricity, gas and water sector contracted 
6.2% in the first quarter, reflecting the inability of power utility 
Eskom to meet rising demand.  The rising cost of credit knocked 
growth in financial services, the economy's biggest sector, down 
from 8.5% in the fourth quarter of 2007 to 4.9% in the first quarter 
of 2008.  The star performer of the economy was the construction 
sector, which rocketed 14.9% in the first quarter, reflecting the 
launch of a large official infrastructure spending program over the 
next few years.  Agriculture increased 12.5% from the previous 
quarter, in response to higher crop harvests, spurred partly by the 
continuing surge in food prices.  Economists attributed the slowdown 
in economic growth primarily to the power outages that led to a 
sharp contraction in mining output and curbed activity in the key 
manufacturing sector, as well as the rising cost of credit which 
affected growth in financial services.  However, analysts felt that 
it is unlikely that the disappointing GDP growth figures would 
convince the South African Reserve Bank (SARB) not to increase 
interest rates at its policy meeting next month, because of soaring 
inflation.  Chamber of Mines Chief Economist Roger Baxter warned 
that growth prospects for mining and other major industries were 
likely to remain "constrained" by power limitations during the rest 
of the year.  "This is worrying as mining accounted for more than 
half of SA's exports", he said.  Economists predict that growth will 
slow to between 3.0% and 4.0% this year, from an average pace of 5% 
over each of the past four years.  (Business Day, May 28, 2008) 
 
--------------------------------------------- 
Large Rate Hike Looms as Inflation Hits 10.4% 
--------------------------------------------- 
¶3. (U) South African Reserve Bank (SARB) Governor Tito Mboweni 
warned that interest rates may rise by up to two percentage points 
at the SARB's policy meeting next month, after news that inflation 
Qat the SARB's policy meeting next month, after news that inflation 
had accelerated to a new five-year peak in April 2008.  Statistics 
South Africa (StatsSA) data showed that the annual rise in the CPIX 
inflation increased from 10.1% in March to 10.4% in April, the 13th 
month in a row that CPIX has breached the 3%-6% official target 
range.  "I'm speechless," said Brait Economist Colen Garrow after 
the CPIX data was released. "We've got a classic case of stagflation 
... rising inflation, lower growth and high unemployment." 
Government bonds slid and banking shares fell 1.9% as markets 
reacted to fears that interest rates will rise more sharply than 
expected this year, as electricity tariff hikes and wage rises add 
to upward pressure on prices.  "You don't have to be a genius to 
tell that interest rates have to tighten ... with CPIX at 10.4%, 
drastic measures are required," Mboweni said.  The SARB has raised 
lending rates by 4.5 percentage points since June 2006 in a bid to 
ease spreading price pressures, sparked by the soaring global cost 
of food and fuel.  That has pushed debt costs sharply up, curbing 
consumer spending and helping to slow economic growth.  (Business 
Day, May 29, 2008) 
--------------------------------------------- ----- 
2000 Foreign Math and Science Teachers Head for SA 
 
PRETORIA 00001146  002.2 OF 005 
 
 
--------------------------------------------- ----- 
¶4. (U) Department of Education (DOE) Deputy Director General Firoz 
Patel told the National Assembly's portfolio committee on education 
that his department will employ 2,000 foreign math and science (M&S) 
teachers in the next two years.  Patel said there was a critical 
shortage of skills in M&S teaching in SA and DOE still had to 
address the issue of under-qualified teachers.  He said DOE already 
has 1,432 foreign teachers working in local schools, and has 
received enquiries about employment from Asia and the U.S.  The 
program will run for three years, with the first 1,000 group of 
teachers arriving in October 2008.  The Department of Home Affairs 
has allocated 4,000 permits for the anticipated teachers.  In an 
effort to increase interest in M&S teaching, DOE has allocated R500 
million ($66.6 million) in incentives for teachers.  It has also 
established a four-year bursary fund for teacher training programs. 
DOE is aiming to address the issue of under-qualified teachers by 
¶2013. (Pretoria News, May 28, 2008) 
---------------------------------------- 
SAA Reaches Salary Agreement with Pilots 
---------------------------------------- 
¶5. (U) National carrier South African Airways (SAA) announced that 
it has reached salary and restructuring agreements with its pilots 
that would facilitate greater labor stability and assist the airline 
with its return to sustainable profitability.  The airline and the 
pilots union agreed to a three-year salary agreement, as well as a 
restructuring agreement.  This follows a multi-year wage agreement 
reached earlier in May with trade unions representing cabin crew and 
ground staff.  "Reaching an agreement with our pilots will assist us 
immensely with our plans to expand our fleet and to explore 
opportunities for growth.  We can now as a team focus on 
consolidating the airline's restructuring program, as well as 
growing the business," said CEO Khaya Ngqula.  The parties have 
agreed to use a local market-based formula for salary increases for 
2008/9 and 2009/10.  A study will be conducted to benchmark salary 
increases to comparable job categories in SA.  SAA also said that it 
had suspended its Maintenance of Parity agreement and temporarily 
replaced it with the three year-salary agreement.  (Business Report, 
May 20, 2008) 
-------------------------------------------- 
PetroSA Mulls Challenge to Transnet Pipeline 
-------------------------------------------- 
 
¶6. (U) State-owned logistics company Transnet's new R11.2 billion 
($1.45 billion) fuel pipeline from the Port of Durban could get a 
competitor if state-owned oil and gas company PetroSA proceeds with 
its plans for a similar venture.  PetroSA announced that it was 
studying the feasibility of an alternative pipeline from the new 
port in Coega to Gauteng.  PetroSA Vice-President Joern Falbe said 
the study was expected to be completed by the end of 2008. 
"Technically it would be possible to have the pipeline up and 
running by 2014 - in seven years time," he said without disclosing 
the expected cost and capacity of the pipeline.  Transnet announced 
earlier that its new pipeline was expected to begin pumping fuel 
Qearlier that its new pipeline was expected to begin pumping fuel 
during the third quarter of 2010.  News of the possible additional 
pipeline came as PetroSA said that it had increased the capacity of 
its proposed Coega oil refinery by 60% to 400,000 barrels a day and 
at a cost of $11 billion.  SA's six refineries can process up to 
708,000 barrels a day.  Expanding the planned size of the PetroSA 
refinery comes at a time of growing demand for fuel in the local 
economy, which has resulted in shortages and greater imports.  Power 
shortages have resulted in greater demand for diesel.  PetroSA said 
the increase in the planned size of the refinery came thanks to 
input from potential international partners who recognized the 
flexibility of Coega to supply diverse markets and mitigate risk. 
After evaluating all operational, logistical and environmental 
considerations, 400,000 barrels a day was considered to be the most 
suitable configuration, Falbe said.  "Due to the economies of scale, 
the investment cost per barrel reduces by 20% and operating costs 
improve by 30%, boosting the original project economics 
substantially," he added.  The proposed refinery, which PetroSA said 
would be the lowest-cost producer in sub-Saharan Africa, was 
expected to start operating by 2014, when South Africa's demand for 
refined oil is expected to exceed existing refining capacity by 
about 200,000 barrels a day.  In the absence of a new refinery, SA 
would have had to import the shortfall, a more expensive solution 
because it would drain the country's foreign exchange reserves. 
(Business Report, May 23, 2008) 
 
--------------------------------- 
 
PRETORIA 00001146  003.2 OF 005 
 
 
Power Tariff Smoothing Prevailing 
--------------------------------- 
¶7. (U) The consensus of speakers at the National Energy Regulator of 
SA (NERSA) May 23-27 hearings into Eskom's application for a 60% 
tariff increase supported a smoothed, or more gradual, five-year 
approach to increasing electricity prices.  The tariff smoothing 
approach and safeguards for the poor and continued economic growth 
were also the consensus from the May 16 National Energy Summit.  The 
five-year smoothing suggestion appeared to trigger an announcement 
by international ratings agency Moody's that it might cut Eskom's 
credit rating.  Moody's issued a statement: "The action reflects 
Moody's concerns over the potential negative effects of possible 
less-than-expected tariff increases on Eskom's financial profile and 
that government support for Eskom may not be as clear and as 
unambiguous as reflected in Moody's current high-support 
assumption."  Standard & Poor's previously placed Eskom on so-called 
negative watch for the same reasons.  At the hearings, Chamber of 
Mines Chief Economist Roger Baxter described the government's 
commitment of $9 billion to Eskom as a "capital injection" and a 
clear sign of the government's support for the 100% government-owned 
entity.  Another outcome of the National Energy Summit was 
commitment to create an electricity advisory council of government, 
business, labor, and community representatives to advise government 
and Eskom on how the utility could meet its funding requirements for 
about $50 billion in its five-year build program.  Embattled Eskom 
Chairman Valli Moosa broke his controversial silence, rejecting 
NERSA's assertion that Eskom management had been pre-occupied with 
profitability at the expense of safeguarding supply security.  Moosa 
also blamed South Africa's affluent homeowners for using energy 
inefficiently.  (Engineering News and Business Day May 22-27, 2008) 
---------------------------------- 
Xenophobia Affects Mine Production 
---------------------------------- 
¶8. (U) Mid-tier gold-miner DRDGold reported that worker attendance 
at its ERPM mine near Boksburg was back to normal, after a week of 
erratic turnouts cut production.  A company spokesperson said 
violent outbreaks in informal settlements that targeted foreigners 
"seemed to have calmed down", and production should soon be at 
normal levels.  One-third of ERPM's workforce are citizens of 
neighboring countries, mainly Mozambique.  DRDGold previously 
announced that two of its workers had been killed in the mob 
brutality that swept through Gauteng's squatter camps before 
spreading to other provinces.  The National Union of Mineworkers 
condemned the violent attacks on foreigners, describing them as a 
"disgrace to our revolution".  A separate article quoted a local 
mine worker speaking to ANC President Jacob Zuma: "The reason the 
Mozambicans were targeted was because bosses put them in charge over 
us at work.  This is because every time the white man says 'Do 
this', the Shangaan (Mozambican) says, 'Yes baas!'"  Note: Mine 
management has reported that Mozambicans have a reputation for 
talent and intelligence as team managers.  (Engineering News and The 
Qtalent and intelligence as team managers.  (Engineering News and The 
Times, May 26, 2008) 
---------------------------------------- 
Union Calls for Nationalization of Mines 
---------------------------------------- 
¶9. (U) South Africa's largest mineworkers union, the National Union 
of Mineworkers (NUM) called for the nationalization of the country's 
mines as a way of dealing with the country's energy crisis. 
Speaking at the union's central committee meeting, NUM President 
Senzeni Zokwana said, "if the government was concerned about the 
high cost of coal and the high fuel costs, it should nationalize 
mines and turn coal-to-liquids provider Sasol into a state-owned 
entity.  In February, the ruling ANC's Secretary-General Gwede 
Matashe said the country had to create more state-owned enterprises 
in the mining industry.  He particularly highlighted the platinum 
industry.  (Mining Weekly, May 23, 2008) 
----------------------------------- 
Indian Company Considers MTN Merger 
----------------------------------- 
 
¶10. (U) MTN Group has started talks with Indian mobile-operator 
Reliance Communications that could lead to the creation of a $66 
billion emerging markets telecom group.  Reliance, India's number 
two mobile-operator, quickly stepped into the void after bigger 
rival Bharti Airtel pulled out of talks with MTN.  A combination of 
MTN (valued at $38 billion) and Reliance (valued at $28 billion), 
would create a top-ten global industry player.  In terms of 
subscribers, a merged group would slot in just below Deutsche 
Telekom, as the seventh largest in the world.  Reliance recently 
 
PRETORIA 00001146  004.2 OF 005 
 
 
bought Ugandan Anupam Global Soft, stating it would launch mobile 
services in Uganda by the end of 2008 and spend up to $500 million 
over five-years to build a telecom network there.  Analysts said 
Reliance and MTN might swap shares, as the foreign holding in 
Reliance Communications was considerably lower than in Bharti 
Airtel, a factor that was seen as a possible roadblock for Bharti's 
attempted deal.  Foreign ownership of Indian telecom firms is capped 
at 74%, and Singapore Telecommunications already owned a 30.5% share 
of Bharti.  Media and industry analysts had speculated that Bharti 
was eyeing a 51% stake in MTN.  MTN is seeking new markets outside 
Africa and the Middle East and will likely push to retain its brand 
and culture.  Reliance and MTN said that the two groups had entered 
into exclusive talks about combining their businesses.  A 45-day 
exclusivity period will be in force, during which neither can talk 
to any other entity.  Reliance Chairman Anil Ambani, one of India's 
richest men, said a deal with MTN could "provide investors, 
customers and the people of both companies a global platform for 
exponential growth".  "Reliance Communications is smaller than MTN, 
and lacks the financial muscle for a takeover, but it is not going 
to want to be a subsidiary, either," said a telecom analyst.  The 
two firms were instead likely to create a new company, with MTN 
taking a 51% stake.  (Business Report, May 28, 2008 and Engineering 
News, May 26, 2008) 
 
--------------------------------------------- ----- 
ICASA Rejects Bid to Force Pay-TV Providers to Pay    for Public 
Broadcaster's Content 
--------------------------------------------- ----- 
 
¶11. (U) The Independent Communications Authority of SA (ICASA) has 
rejected the South African Broadcasting Company's (SABC) bid to 
force pay-television providers such as MultiChoice to pay for the 
privilege of carrying the public broadcaster's channels.  In 2007, 
SABC proposed that MultiChoice and new players Telkom Media, Walking 
on Water, and On Digital Media should pay for the content of SABC1, 
SABC2 and SABC3, saying the channels boosted the uptake of 
subscription services in the market.  It pressed ICASA to enforce a 
"must carry, must pay" policy.  The move raised speculation that 
SABC was seeking to boost its finances after profit for the 2006/07 
financial-year fell 52%.  But in draft regulations released this 
week, ICASA dismissed the public broadcaster's request and proposed 
that every operator must continue carrying its own cost. 
MultiChoice carries SABC1, SABC2 and SABC3 without charge.  In its 
findings, the regulator said "must carry" obligations should not be 
imposed as financial support for any broadcaster.  The SABC should 
offer its channels free of charge and deliver its signals to the 
subscription operators at its own cost.  Any costs outside the 
signal delivery and carriage of the channels should be based on 
commercial negotiations between the parties.  Under the Electronic 
Communications Act, subscription broadcasters must carry the public 
service channels to fulfill universal access obligations.  During 
hearings last year, MultiChoice, On Digital Media, and Telkom Media 
Qhearings last year, MultiChoice, On Digital Media, and Telkom Media 
argued that they would be helping the SABC to meet its universal 
access duties by carrying the channels, because the terrestrial 
signal was weak in some areas.  Airing the channels to 
pay-television consumers boosted the public broadcaster's 
negotiating powers with advertisers, MultiChoice added.  If ICASA 
imposed the "must pay" obligation, MultiChoice cautioned, the costs 
might be passed on to consumers, who would be paying twice for 
channels as they already had to pay SABC television license fees. 
There were also concerns that the SABC might not offer channels such 
as SABC3, which it views as a commercial station, if ICASA did not 
impose the remuneration obligation.  The SABC argued that 
subscription broadcasters were obliged to carry its public service 
channels, but it was not mandatory for the SABC to offer all of its 
content to them.  ICASA's draft stated that SABC would have to make 
its channels available to all the players on a non-discriminatory 
basis.  (Business Report, May 29, 2008) 
 
-------------------------------------- 
Cape Town Builds Five-Star "Dry" Hotel 
-------------------------------------- 
 
¶12. (U) A new five-star "dry" hotel aimed at the Middle Eastern 
market is being built in central Cape Town at a cost of R220 million 
($29 million).  Pam Golding Properties is marketing 30 of the 140 
hotel rooms and suites in the Coral International Hotel.  The hotel 
is being built in Bokaap, an area with strong historical Muslim 
links.  Pam Golding Area Manager Basil Moraitis said construction 
 
PRETORIA 00001146  005.2 OF 005 
 
 
began at the beginning of May and should be completed by the end of 
¶2009.  Moraitis said one of the largest suites had been bought by a 
member of an Emirates royal family, Sheikh Faisal Bin Sultan Al 
Qasimi from the ruling family of Sharjah.  Moraitis said the 
developers wanted to create a hotel that appealed to Middle Eastern 
visitors and businessmen and was being built to the "highest 
standards with prayer rooms".  The luxury hotel will include a 
fitness center, meeting rooms, conference facilities and three 
different restaurants that will serve food according to Muslim 
dietary restrictions (halaal).  (Business Day, May 26, 2008) 
 
------------------------------------- 
Xenophobia Impacts Provincial Tourism 
------------------------------------- 
 
¶13. (U) Tourism KwaZulu-Natal (TKZN) CEO Ndabo Khoza held a press 
conference in Durban on May 27 to condemn xenophobic violence and 
outline steps to curb the negative impact on tourism in KZN.  Khoza 
noted that Africa is SA's most important source of foreign visitors 
and tourism income.  He added that "in terms of spending per trip by 
international tourists in 2006, visitors from Mozambique topped the 
list, each spending R21,000 ($2,700)."  Spending by tourists from 
Angola ($1,660), India ($1,500), Nigeria ($1,480), and U.S. ($1,430) 
rounded out the top-five list.  TKZN Chairman Seshi Chonco said that 
"after the domestic tourism market, Africa was the province's most 
important source of tourists."  The African market accounts for 67% 
(6.8 million) of foreign visitors and generates as much as R4 
billion ($519 million) a year in revenues.  Chonco described 
"overnight tourists" from neighboring towns in Swaziland, 
Mozambique, and Lesotho, who come into SA on short shopping trips, 
as the bread and butter for the KZN border towns and thought the 
xenophobic incidents put that at risk.  Khoza and Chonco hoped to 
send a positive message to nurture the "valuable African tourism 
market."  (Mercury, May 28, 2008) 
 
 
BOST