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UNCLAS SECTION 01 OF 05 PRETORIA 001522 
 
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 JUNE 20, 2008 
ISSUE 
 
PRETORIA 00001522  001.2 OF 005 
 
 
¶1. (U) Summary.  This is Volume 8, issue 28 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- Reserve Bank Steps Up Growth in Currency Reserves 
- Big Dip in Business Confidence 
- House Prices Rocked by Largest Decline in Fifteen Years 
- Black Business and Professional Organizations Reject 
  Ruling on Chinese 
- New Vehicle Sales Slump 21.9% 
- Airlines Hesitant to Fly Directly to Durban's New 
  International Airport 
- Nationwide May Come Out of Liquidation 
- SAG-led AWCC Project Faces Further Delays 
- ICASA Rethinks its BEE Stance 
- Share Swap and Cash May See Ambani-led Group Buy a 51% 
  Stake in MTN 
- DTI Launches Rural Tourism Promotion Scheme 
End Summary. 
 
--------------------------------------------- ---- 
Reserve Bank Steps Up Growth in Currency Reserves 
--------------------------------------------- ---- 
 
¶2. (U) SA's gold and foreign currency reserves increased by 1.3% to 
$34.9 billion at the end of June 2008.  The foreign reserves 
build-up was supported by both the higher gold price and the SA 
Reserve Bank's (SARB) increased pace of foreign currency purchases. 
The SARB is under pressure to build reserves to cover the growing 
current account deficit and rising import requirements as the SAG 
steps up infrastructure spending.  The current account deficit 
reached 9% of gross domestic product in the first quarter of 2008, 
the highest in 26 years, as record oil prices and infrastructure 
spending fueled imports.  (Business Report, July 8, 2008) 
 
------------------------------ 
Big Dip in Business Confidence 
------------------------------ 
 
¶3. (U) The SA Chamber of Commerce and Industry (SACCI) reported that 
its Business Confidence Index slipped to 92.6 index-points in June 
2008, its lowest level since October 2003.  Business confidence is 
down 7.4% from 2000, when the index was set to 100.  The index hit a 
peak of 103.5 index-points in December 2006, and has moved downwards 
since.  SACCI asserts that its index does not have the "wild mood 
swings of the opinion poll-based business confidence index done by 
the Stellenbosch University's Bureau of Economic Research (BER)" 
since SACCI calculates its index from data rather than opinion 
polls.  The BER's Business Confidence Index plunged 19 index-points 
during the power crisis of the first quarter and then a further 3 
index-points in the second quarter, taking it to 45 index-points. 
Less than 50 index-points indicate a contracting economy.  The BER's 
Consumer Confidence Index decreased by 18 index-points in the second 
quarter of 2008 to -6 index-points , the biggest drop in 24-years 
and its first negative level since the first quarter of 2004.  The 
BER's Purchasing Managers' Index, which is seen as a reliable gauge 
for the manufacturing sector, dropped from 49.1 index-points in May 
to 43.8 index-points in June.  (Business Times, July 6, 2008) 
 
--------------------------------------------- ---------- 
House Prices Rocked by Largest Decline in Fifteen Years 
--------------------------------------------- ---------- 
¶4. (U) The latest ABSA House Price Index revealed that real house 
prices in the middle segment of the market dropped 6.3% y/y in May, 
Qprices in the middle segment of the market dropped 6.3% y/y in May, 
the biggest plunge in 15 years.  Activity levels in the residential 
property market, as well as nominal and real house price growth, are 
expected to taper off further from current levels towards the end of 
2008 and into 2009.  Nominal house price growth is forecast to slow 
to around 5% in 2008 and slowing further to 4% in 2009.  Short-term 
indicators, such as new vehicle purchases and retail sales, continue 
to suggest a slowdown in household spending.  This slowdown plus the 
negative wealth effects associated with slower house price growth, a 
tighter credit environment, falling consumer confidence levels and 
uncertainty around employment prospects are expected to continue to 
weigh on economic activity.  However, considering the upside risks 
to inflation emanating from rising food, fuel and electricity 
prices, second-round inflationary pressures and rising inflation 
expectations, it is unlikely that the slowdown in growth will sway 
the inflation-targeting SA Reserve Bank from its tight monetary 
 
PRETORIA 00001522  002.2 OF 005 
 
 
policy.  Most economists believe there is a high probability of 
another interest rate hike in August, and some believe there will 
one or more hikes after that.  With no quick end in sight to 
rocketing inflation and interest rates that have knocked the 
economy, struggling homeowners can expect things to get worse before 
they get better.  (ABSA Newsletter, July 8, 2008) 
 
--------------------------------------------- 
Black Business and Professional Organizations 
  Reject Ruling on Chinese 
--------------------------------------------- 
 
¶5. (U) Black business and professional organizations rejected the 
Pretoria High Court's ruling defining Chinese South Africans as 
colored, or "black," for the purpose qualifying as beneficiaries 
under the Broad Based Black Economic Empowerment Act.  "This 
judgment, in our view revises a long-held historical view of the 
democratic struggle in SA," National African Federated Chambers of 
Commerce President Buhler Nthethwa said.  "It is our considered view 
that the responsibility of clarifying legislative and policy 
ambiguities rest with the legislative or executive arms of 
government."  (Business Day, July 2, 2008) 
 
----------------------------- 
New Vehicle Sales Slump 21.9% 
----------------------------- 
¶6. (U) The National Association of Automobile Manufactures of SA 
(NAAMSA) reported that new vehicle sales declined by 21.9% y/y in 
June 2008.  This is 10,956 units less than the 50,020 units sold in 
June 2007.  NAAMSA said the new vehicle sales environment continued 
to reflect extreme weakness as the current tight monetary conditions 
continued to weigh on consumer spending.  Passenger vehicle sales 
declined by 7,964 units or 25.8% y/y to 22,861 units in June 2008, 
while light commercial vehicle sales declined by 3,021 units or 
18.2% y/y to 12,975 units during the same period.  However, sales of 
heavy vehicles and trucks increased by 192 units or 9.8% y/y in June 
¶2008.  Vehicle exports continued to perform well and export sales 
were supporting the operations of vehicle and component producers, 
NAAMSA said.  Export sales reflected a 52.7% y/y improvement for the 
first half of 2008.  NAAMSA expects new vehicle sales in the 
domestic market to remain under severe pressure as a result of the 
cumulative effect of inflationary pressures, interest rate 
increases, the National Credit Act, high levels of personal debt, 
and a slowdown in economic activity.  The relatively competitive 
exchange rate and existing vehicle export contracts should continue 
to lend support to vehicle and component export activities over the 
medium-term.  (Business Day, July 2, 2008) 
 
------------------------------------ 
Airlines Hesitant to Fly Directly to 
Durban's New International Airport 
------------------------------------ 
 
¶7. (U) Rising fuel prices have led Emirates airline to postpone the 
launch of its direct service from Dubai to Durban, originally 
scheduled to launch in December.  South African Airways (SAA) and 
British Airways (BA) have also both confirmed they have no plans to 
operate to the new Durban International Airport at La Mercy.  These 
airlines do not plan to take advantage of the SA Department of 
Transport's recent approval of direct frequencies between the UK and 
QTransport's recent approval of direct frequencies between the UK and 
Durban in 2010.  BA told TravelHub that it had "no plans to operate 
flights to Durban".  SAA confirmed that its network strategy was 
aligned to its restructuring program, which aims to build up 
Johannesburg as the strongest hub in Africa.  SA Board of Airline 
Representatives CEO Allan Moore explained that the majority of major 
airlines are members of alliances and rely on the network of feeder 
flights operated by the home carrier of the alliance.  According to 
Moore, it "is more common to find airlines serving an entry port 
rather than a number of destinations within a country."  Moore noted 
that the new airport "will have to compete on its own merits to 
attract the attention of airlines, and airlines will have to see the 
destination as viable before they consider adding it to their 
network."  Airlines have objected to the construction of La Mercy, 
saying they had only been consulted on whether or not they would fly 
there and if so, what their requirements were, after the Airlines 
Company of SA (ACSA) had already embarked on the project.  Lufthansa 
Swiss Director for Southern & Eastern Africa Gabriel Leupold 
recently objected to cross subsidization, where Johannesburg-based 
airlines were funding the construction of La Mercy airport.  Gabriel 
 
PRETORIA 00001522  003.2 OF 005 
 
 
said, "International airlines will review their markets and decide 
whether or not to deploy aircraft on a route based on how much 
business sense it makes to launch a route.  Not because more traffic 
rights have been granted."  (Travel Hub Report, July 8, 2008) 
 
-------------------------------------- 
Nationwide May Come Out of Liquidation 
-------------------------------------- 
 
¶8. (U) The SA press is reporting that Nationwide Airlines could soon 
come out of liquidation and be taken over by a new airline that will 
begin operating from Durban International Airport in three months. 
Nationwide was provisionally liquidated at the end of April and a 
proposal to buy the airline is currently on the table.  Whether the 
new airline would operate under the Nationwide name or start with a 
new identity is still being discussed.  This move would come on the 
back of a recent announcement by Emirates to abandon plans for 
direct flights between Dubai and Durban due to high fuel costs. 
Nationwide attorney Haroon Laher said he was in the process of 
drafting legal documents following a successful meeting with the 
potential buyer this week.  A meeting between the company's 
attorneys and the liquidators will take place next week before the 
process goes further.  If the liquidators approve the transaction, 
the company will come out of liquidation and a compromise will be 
sought regarding liabilities to all creditors.  "All employees will 
be considered for re-employment (by the new company)," Laher said. 
Laher would not give details regarding the identity of the potential 
buyer or the type of airline the buyer would operate, but media 
reports said it would operate as a low-cost rival to Kulula, 1Time, 
and Mango.  Laher also confirmed that there were strong indications 
that the company would use Durban as its headquarters.  Some key 
employees in Durban have already been contacted to establish their 
availability should the new airline take off.  Rumors that the 
interested party was associated with Dubai could not be confirmed. 
(All Africa News, July 5, 2008) 
 
----------------------------------------- 
SAG-led AWCC Project Faces Further Delays 
----------------------------------------- 
 
¶9. (U) A delay in finalizing the commercial and legal agreements for 
the consortium that plans to participate in the $510 million African 
West Coast Cable (AWCC) means that financial closure is now unlikely 
to be achieved by mid-July as first planned.  The AWCC is a SAG-led 
initiative, which involves the deployment of a 
3,840-gigabits-per-second, undersea, fiber-optic cable. 
State-owned, ICT infrastructure company Broadband Infraco will own 
26% of the cable and a range of private-sector participants will own 
the remaining 74%.  The AWCC project will incorporate branching 
units in at least ten countries along the West Coast of Africa and 
terminate in London.  The AWCC system will follow roughly the same 
route as the Telkom-controlled South Atlantic-3 (Sat-3) cable, while 
also competing with the cable that is being built along Africa's 
East Coast by the U.S.-led SEACOM consortium.  However, the SEACOM 
contracts are finalized and construction is expected to be completed 
Qcontracts are finalized and construction is expected to be completed 
by June 14, 2009, well in advance of the start of the 2010 FIFA 
World Cup.  Broadband Infraco is leading the AWCC initiative and has 
admitted that the initial schedule could not be met.  Broadband 
Infraco Director Cornelis Groesbeek explained that the conclusion of 
the consortium agreement was one of two key requirements for 
achieving financial closure.  Groesbeek assured the press that 
weekly review meetings are now being held to finalize the agreement. 
 There are reportedly 14 signatories to the process, but Groesbeek 
said a decision has also been made to release the names of the 
participants only after the financial deal is finalized.  He said 
Broadband Infraco is currently finalizing the contract terms and 
conditions for the manufacture and deployment of the cable with a 
preferred supplier, but he said the name of the supplier will only 
be made public "once the contract has been signed".  He reported 
that it will take "roughly 27 months" from financial closure to 
commissioning.  This implies a "ready for service date" in the 
latter half of 2010, after the completion of the FIFA World Cup. 
"The 2010 traffic will be carried on the upgraded SAT-3 system," 
Groesbeek asserted.  However, he revealed that "2010 contingency 
plans" have been designed into the AWCC project schedule.  "In the 
event that either Infraco or any one of the private-sector 
participants needs to carry 2010 World Cup traffic on the AWCC, we 
will land the cable in Portugal from the Northern Branching unit 
ahead of the World Cup and then complete the last section of the 
 
PRETORIA 00001522  004.2 OF 005 
 
 
system up to the UK after the event," he concluded.  (Engineering 
News, July 9-11, 2008) 
 
----------------------------- 
ICASA Rethinks its BEE Stance 
----------------------------- 
 
¶10. (U) Widespread criticism of "unworkable" Black Economic 
Empowerment (BEE) demands for new high-speed WiMax internet access 
license bidders have forced the Independent Communications Authority 
of SA (ICASA) to reconsider its stance.  Six new wireless licenses 
had been earmarked for companies with at least 51% black-ownership. 
This provoked an outcry that companies that could meet the BEE 
requirement would lack the cash, skills, and the technical know-how 
to operate a national network.  One of the few companies that 
believes it has the cash and the skills to succeed is 65% 
black-owned UniNet, chaired by former Telkom CEO Papi Molotsane. 
UniNet has sufficient resources from financiers to plan a R1.6 
billion ($208 million) expansion.  The outcry has prompted ICASA to 
backtrack and ask the industry to comment on its licensing 
requirements.  An ICASA spokesman would not confirm whether the 
comments would influence a reworking of the BEE requirements. 
According to critics, the rules not only prejudice traditional 
white-owned bidders, but also make it unnecessarily tough on 
potential black bidders.  Internet Solutions Chief Regulatory 
Officer Siyabonga Madyibi said 51% black ownership was a blatant 
contradiction to ICASA's existing policy of issuing licenses to 
companies that are 30% black, and he would lobby for that to be 
relaxed.  The high black equity demand would deter foreign investors 
and deprive license winners of foreign expertise, said industry 
analysts.  The new rules stop license winners from merging with 
larger players for at least five years, so they could not use the 
license to strike a deal to strengthen their business.  That would 
force them to fund the network themselves, and financiers are 
unlikely to back a new entrant in a sector dominated by Telkom, 
MWeb, Internet Solutions and the cellular operators.  As companies 
that qualified for a WiMax license were likely to be relatively new, 
investors would be loath to take a minority stake that gave them no 
control over the business.  ICASA Spectrum Manager Mandla Mchunu has 
already admitted that it will be difficult for firms that meet the 
criteria to succeed in building a national internet operation. 
ICASA will face a deluge of written complaints, since major 
technology companies are keen to win the WiMax licenses.  Companies 
are also concerned that the licenses only grant 20 megahertz of 
spectrum, giving them too little bandwidth to operate effectively. 
UniNet representatives contend that license operators need at least 
30 megahertz to offer a wide range of voice, data and video 
services.  (Business Day, July 9, 2008) 
 
-------------------------------------- 
Share Swap and Cash May See Ambani-led 
  Group Buy a 51% Stake in MTN 
-------------------------------------- 
 
¶11. (U) SA mobile operator MTN has agreed to extend its merger talks 
with India's Reliance Communications.  Bloomberg reported that a 
group headed by Anil Ambani plans to buy 51% of the MTN Group by 
offering cash and a share swap.  Under this deal, MTN shareholders 
Qoffering cash and a share swap.  Under this deal, MTN shareholders 
are expected to receive cash and shares in Reliance Communications, 
with the aim of making Reliance an MTN-controlled company.  However, 
the Ambani-led group will hold control over both companies by virtue 
of becoming a 51% shareholder in MTN.  The deal is reportedly 
structured to ensure that the Ambani group retains shareholding in 
Reliance telecoms and steers around the right of first refusal 
controversy that erupted earlier.  The initial deadline, which gave 
Ambani's Reliance 45 days for exclusive negotiations, was extended 
as MTN needed more time to study the deal.  Successful negotiations 
would lead to the creation of one of the world's top ten cellular 
companies.  Should this deal go ahead, and depending on the 
structure of the share swap and cash components, there could be an 
inflow of foreign direct investment to SA.  This could go some way 
in plugging the financing requirement for SA's ballooning current 
account deficit and reduce some of the downside risks associated 
with the currency.  (ABSA Newsletter, July 8, 2008) 
 
------------------------------------------- 
DTI Launches Rural Tourism Promotion Scheme 
------------------------------------------- 
 
 
PRETORIA 00001522  005.2 OF 005 
 
 
¶12. (U) The Department of Trade and Industry (DTI) launched the 
Tourism Support Program (TSP) to boost tourism outside of the 
existing urban clusters of Cape Town, Durban, and Johannesburg. 
Minister of Trade and Industry Mandisi Mpahlwa believes the new 
scheme will encourage growth in the tourism sector across the 
country instead of just certain areas.  Mpahlwa said, "TSP seeks to 
specifically promote sustainable job creation outside the 
traditional tourism destination clusters and to encourage greater 
transformation in the sector by placing a strong emphasis on 
broadening participation in the sector."  The TSP will replace the 
DTI's Small and Medium Enterprises Development Program (SMEDP), 
which was shut down in 2006 because "deserving" tourism businesses 
were not benefiting from the grant system.  "Our decision to suspend 
the SMEDP was done for a good reason, but was misunderstood and 
criticized by the media," said DTI Director General Tshediso Matona. 
 He said, "It had some major weaknesses and suspending the program 
was the only way we could fix things."  Matona noted that the new 
program is far more promising in terms of supporting deserving 
enterprises.  Businesses looking for incentive grants will be 
expected to meet certain criteria in order to qualify.  This will 
include being situated outside of the traditional tourism clusters 
defined by the program, achieving a level-four Broad Based Black 
Economic Empowerment status, and promoting the creation of 
sustainable jobs.  (Travel Hub Report, July 7, 2008) 
 
 
BOST