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RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
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UNCLAS SECTION 01 OF 05 PRETORIA 001584 
 
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 00001584  001.2 OF 005 
 
 
¶1. (U) Summary.  This is Volume 8, issue 29 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- OECD Thinks SAG Is too Dominant in Economy 
- ANC Will Keep Inflation Targeting 
- Crime Crippling Small Business 
- SADC to Launch Free Trade Area 
- Mercosur Trade Agreement Concluded 
- U.S. Signs Trade and Investment Agreement with SACU 
- SAA Optimistic Despite Posting Loses 
- Kulula Irked by SAA Begging Bowl 
- Quantas Bumps up SA Route 
- Transnet Asserts that Eskom's Rating Should not Affect 
  It's Expansion Plans 
- Eskom Taps Former Gold-Miner Bobby Godsell as New 
  Chairman 
- Policy Release May Clear Way for Eskom Nuclear 
  Power Plants 
- SA's Engen Snaps up Shell's Business in Zimbabwe 
End Summary. 
 
------------------------------------------ 
OECD Thinks SAG Is too Dominant in Economy 
------------------------------------------ 
 
¶2. (U) The Organization for Economic Co-operation and Development 
(OECD) said South Africa must do more to improve competition in its 
economy, and gives the state too big a role in tackling the 
constraints to growth.  In its first report on South Africa, the 
30-member group criticized the South African government's latest 
strategy for development, the Accelerated and Shared Growth 
Initiative for SA (ASGISA), saying that some of its policy responses 
were weak or inappropriate.  Plans to give incentives to some 
industries to create more jobs would limit competition, while 
government programs and initiatives were "at odds with the 
recognition of failures of official planning, co-ordination and 
capacity" to achieve faster growth, the OECD-group said.  The 
dominance of large private sector companies was also seen as 
negative, as this could be linked to lower output and employment, 
and higher prices.  The OECD report praised South Africa for 
policies that have boosted economic growth, lowered inflation, and 
produced the country's first budget surpluses in history.  At the 
same time, the report also highlighted what it saw as weaknesses 
stemming from high unemployment, poverty, the spread of HIV/AIDS, 
and crime.  "The most disappointing aspect of post-apartheid 
economic performance is the emergence and persistence of extreme 
levels of unemployment," it said.  The report is a result of the 
OECD's drive to boost co-operation with emerging market economies 
that may want to join the organization in the future.  Many of the 
OECD's conclusions appear to clash with plans by the African 
National Congress (ANC) to bolster the role of the state as it works 
to ease chronic poverty and income inequality.  ANC President Jacob 
Zuma has said, for example, that the party wants to put the state 
right at the center of development, with a "critical role" for state 
enterprises.  (Business Day, July 16, 2008) 
 
--------------------------------- 
ANC Will Keep Inflation Targeting 
--------------------------------- 
 
¶3. (U) African National Congress (ANC) Secretary-General Gwede 
Mantashe moved to calm investors' fears that a new ANC government 
would unleash an inflationary spiral by profligate state spending in 
favor of the poor.  Government spending would be focused on 
Qfavor of the poor.  Government spending would be focused on 
investment rather than inflationary consumption spending, and the 
question of a budget surplus or deficit would have to be linked to 
the state of the current account of the balance of payments, 
Mantashe said.  Budget surpluses were not a curse as such, he said, 
but were unacceptable if they arose from the state's inability to 
spend.  He dismissed fears that the post-Polokwane ANC leadership 
was a group of "leftist, low-caliber individuals" who posed a risk 
to the solid foundations built up over the past 14 years.  Mantashe 
strongly supported the continuation of the policy of inflation 
targeting, but urged that the target band be debated.  He believed 
monetary policy should not focus only on inflation but also on 
social issues such as unemployment.  He said it would be 
"disastrous" if land redistribution jeopardized agricultural 
production, saying the policy should not be pursued simply to 
 
PRETORIA 00001584  002.2 OF 005 
 
 
achieve the 30% land transfer target by 2014.  The rural poor should 
be helped to become more self-sufficient in food production and less 
dependent on social grants because "the grant regime is not 
sustainable in the long term."  At the same time, Mantashe stressed 
the need for a greater focus on job creation and social services to 
prevent the alienation of the poor.   Mantashe  said the 2009-10 
medium-term budgetary framework would focus on accelerating the pace 
of economic growth and investment in productive capacity, job 
creation, development of a social security net, and improving the 
capacity and effectiveness of the state, especially in fighting 
crime.  (Business Day, July 17, 2008) 
 
------------------------------ 
Crime Crippling Small Business 
------------------------------ 
 
¶4. (U) A study commissioned by the South African Presidency found 
that a quarter of South Africa's small businesses were reluctant to 
expand or employ more people after having been exposed to crime. 
The smallest, most vulnerable companies and the most successful 
entrepreneurs were the hardest hit.  It was estimated that smaller 
businesses could expect to lose at least 20% of annual turnover to 
crime through direct and indirect costs, which could mean the 
difference between the survival and failure of a small company. 
Half of the companies interviewed had no insurance.  The findings 
have serious implications for the government's economic growth and 
job creation plans, which hinge largely on the development of a 
small business sector that the government believes has the potential 
to lift millions out of poverty and into the mainstream economy. 
The survey found that businesses directly affected by crime were 20% 
less likely to increase their staff numbers, and were 10% were more 
likely to shed jobs, with those in informal settlements or townships 
the most vulnerable.  The survey recommended that more effective 
policing be provided, with greater co-operation among business and 
the police, particularly in the townships and informal settlements. 
It also recommended that the Department of Trade and Industry 
develop mechanisms to assist emerging businesses, such as subsidies 
for burglar- proofing.  (Business Day, July 17, 2008) 
 
 
------------------------------ 
SADC to Launch Free Trade Area 
------------------------------ 
 
¶5. (U) The Southern African Development Community (SADC) is set to 
launch a Free Trade Area (FTA) on August 17.  However, integration 
is not limited to creating an FTA.  The strategic plan of SADC, as 
set out in the Regional Indicative Strategic Plan (RISP), foresees a 
customs union in 2010, a common market by 2015, a monetary union by 
2016, and a single currency by 2018.  SADC private sector 
representatives recently met to discuss the implementation of the 
SADC FTA and the ambitious plans for deeper economic integration. 
Although the private sector participants strongly supported the 
promotion of intra-SADC trade and investment, they agreed that it is 
unrealistic to introduce a customs union until the FTA has been 
fully and successfully implemented.  Private sector organizations 
from eleven of the fourteen member states were in attendance, but 
Qfrom eleven of the fourteen member states were in attendance, but 
the representatives held different views on how to achieve an 
optimal integrated market.  South African representatives were 
primarily focused on exporting products to the rest of SADC as 
efficiently and cheaply as possible. In contrast, representatives 
from the rest of SADC were less concerned about trade facilitation 
and more about supply side capacity required to create the right 
environment for their manufacturing industries.  (Tralac Newsletter, 
July 16, 2008) 
 
---------------------------------- 
Mercosur Trade Agreement Concluded 
---------------------------------- 
 
¶6. (U) The Southern African Customs Union (SACU) has concluded a 
preferential trade agreement with Mercosur, which includes Brazil, 
Argentina, Uruguay and Paraguay. According to SA's Chief Trade 
Negotiator Xavier Carim, all technical negotiations have been 
concluded. The agreement will be submitted to the national 
authorities to ensure legal conformity to national laws.  A date 
will then be determined for ministerial signature and ratification. 
It is not a free trade agreement, but creates a legal framework for 
trade in goods between SACU and Mercosur.  The agreement covers 
 
PRETORIA 00001584  003.2 OF 005 
 
 
2,000 products.  An agreement was built into the pact that allows 
the parties to expand the trade agreement should they wish to do so. 
 (The South African Exporter Supplement, Business Day, July 2008) 
 
--------------------------------------------- ------ 
U.S. Signs Trade and Investment Agreement with SACU 
--------------------------------------------- ------ 
 
¶7. (U) The Southern African Customs Union (SACU) has concluded a 
trade, investment and development co-operation agreement (TIDCA) 
with the U.S.  The pact is not a free-trade agreement.  However, 
South Africa's Chief Trade Negotiator Xavier Carim said the deal was 
important as the parties would look to co-operate on sanitary and 
phytosanitary (SPS) issues and other technical areas.  In terms of 
the agreement, technical barriers to trade would be identified, and 
the parties would attempt to facilitate trade in those areas and 
pursue investment promotion activities.  SACU already has 
preferential access into the U.S. market under the unilaterally 
extended African Growth and Opportunities Act (AGAO).  (The South 
African Exporter Supplement, Business Day, July 2008) 
 
------------------------------------ 
SAA Optimistic Despite Posting Loses 
------------------------------------ 
 
¶8. (U) South African Airways (SAA) has posted a net loss of R1.09 
billion ($142 million) for the 2007/08 financial year.  The loss is 
attributed to once-off restructuring costs of R1.35 billion ($175 
million) and a 1.3% decline in passenger volume.  CEO Khaya Ngqula 
asserted that this is a good result considering that SAA decreased 
its capacity by 30% when it grounded six of its aircraft.  Ngqula 
also said the airline has done extremely well when compared to the 
performance of the global airline industry.  He emphasized that SAA 
is currently above target in the current financial year, and 
although it will be tough, he is confident a profit will be 
achieved.  (Travel Hub Report, July 17, 2008) 
 
-------------------------------- 
Kulula Irked by SAA Begging Bowl 
-------------------------------- 
 
¶9. (U) Low-cost airline Kulula lamented to the press that it is 
fed-up with South African Airways (SAA's) continued requests for the 
South African government to recapitalize the state-owned airline. 
Kulula said that in the past few years the government had poured 
more than R15 billion into SAA, which most recently requested a 
further R6 billion (R2.8 billion of which it has already received in 
the form of a loan).   Following the release of yet another 
disastrous set of results from SAA, Kulula once again called on the 
SAG to keep promise made by the Minister Public Enterprises last 
year that "taxpayers will stop filling the begging bowl for ailing 
state-owned businesses."  Kulula said there were more pressing 
needs, such as education, health, safety and security.  Kulula 
pointed out that "South African aviation is littered with failed 
airlines that could not compete with state-funded SAA - Flitestar, 
SunAir and Nationwide to name just three, and state 
re-nationalization of the industry will continue to be destructive 
to free and fair competition."  The airline also referred to the 
recent OECD report, which highlighted excessive state involvement in 
Qrecent OECD report, which highlighted excessive state involvement in 
the economy, and its constraining effect on growth.   The airline 
said it was bizarre that Comair, which runs Kulula, paid hundreds of 
millions of rands a year in income tax, fuel taxes, value added tax, 
import duties and other levies, only to have this paid over to SAA 
to compensate for its inefficiencies.   (Business Day, July 18, 
2008) 
 
------------------------- 
Quantas Bumps up SA Route 
------------------------- 
 
¶10. (U) Quantas Airways announced that its South African service is 
unlikely to be affected by the airline's recently introduced 
cost-cutting measures, since both its Perth and Sydney routes were 
performing well.  Quantas Manager for Africa Michaela Messner said 
there is a strong demand for both corporate and leisure travel, with 
yearly growth on both routes out of Johannesburg.  Quantas plans on 
increasing its service on the Sydney route by adding a sixth flight 
to its weekly schedule in December.  The decision to add the 
additional flight was a result of strong demand for its newly 
 
PRETORIA 00001584  004.2 OF 005 
 
 
launched Premium Economy Class product.  Messner noted that the 
premium product appealed to passengers who "look to travel in 
comfort but are not able to afford business class."   (Travel 
Industry Review, July 2008) 
 
-------------------------------------- 
Transnet Asserts that Eskom's Rating 
Should not Affect It's Expansion Plans 
-------------------------------------- 
 
¶11. (U) State-owned transport and freight logistics group Transnet 
announced that foreign investors are sufficiently discerning to be 
able to distinguish between the financial health of Transnet and 
state-owned power company Eskom.  Transnet asserted that its ability 
to raise capital should not be undermined, even if Eskom's credit 
rating were to be downgraded.  CEO Maria Ramos will embark on an 
international road show to engage with the credit rating agencies, 
potential investors, and key export credit agencies.  Ramos 
acknowledged that the tightening in the capital markets did coincide 
with a crucial debt-raising year for Transnet, which would be 
seeking to raise nearly R37 billion ($4.8 billion) over the next 
three years.  She said that there was still considerable appetite 
for well managed, emerging-market infrastructure companies.  "There 
are still investors out there looking for good infrastructure 
assets. But it will take careful planning as people will be looking 
at the quality of the credit more carefully, whereas a year ago it 
seemed no-one looked at anything and money was being thrown at you," 
she explained.  For now, the credit-ratings agencies have maintained 
their respective negative outlooks on Eskom, but none had moved to 
downgrade the power utility.  By contrast, Ramos noted that 
Transnet's rating had improved in recent years and that it had 
issued its first bonds without resorting to government guarantees. 
CFO Chris Wells stressed that, despite current financial-market 
stress and illiquidity, the group would press ahead with its plan to 
raise funds from both the domestic and international capital 
markets.  The largest portion of the debt would be raised 
domestically.  "Importantly, though, we are going to need to raise 
money on foreign markets, and we have estimated that it could be 
26%," Wells said.  He cautioned that the percentages could change 
depending on where it would be most cost effective to raise the 
finance.  Transnet's three-year timetable indicated that it would 
have to raise R13.7 billion ($1.8 billion) in the current financial 
year to help fund the R20 billion ($2.6) in capital expenditure the 
company has already budgeted for.  That figure should rise modestly 
to R13.8 billion ($1.8 billion) in 2010, before falling to around R9 
billion ($1.2 billion) in 2011. 
 
--------------------------------------------- ------- 
Eskom Taps Former Gold-Miner Bobby Godsell as New 
Chairman DTI Launches Rural Tourism Promotion Scheme 
--------------------------------------------- ------- 
 
¶12. (U) Well-known business and mining personality Bobby Godsell was 
appointed Eskom Chairman at the state power company's annual general 
meeting on July 17.  The former AngloGold Ashanti CEO will replace 
the embattled Valli Moosa, who has taken criticism for the power 
Qthe embattled Valli Moosa, who has taken criticism for the power 
crisis in South Africa.  Godsell currently serves as chairman of 
Business Unity SA and was formerly president of the Chamber of 
Mines.  His appointment follows the recent appointment of another 
prominent mining figure to catalyze change at Eskom -- former Kumba 
(Iron mining company) CEO Ras Myburgh will advise Eskom on coal 
procurement.  A Business Day editorial welcomed the sorely-needed 
injection of leadership at the power company, citing Godsell's 
experience as a high caliber, tough manager who can apply needed 
attention to detail.  Speaking at a recent conference on the 
electricity crisis, Godsell called for a "Team SA" approach to 
dealing with the crisis, asserting, "This is a national crisis and 
we need a national effort to respond to it.  There is no point in 
having the cheapest electricity in the world if you don't have any 
electricity.  The challenge now is whether our leadership can be 
both cohesive and decisive in the way it was in 1994.  We've had too 
many summits about the crisis; it's time to get on with it." 
(Engineering News, Business Day, Sunday Times, July 13-18, 2008) 
 
-------------------------------- 
Policy Release May Clear Way for 
Eskom Nuclear Power Plants 
-------------------------------- 
 
 
PRETORIA 00001584  005.2 OF 005 
 
 
¶13. (U) Department of Minerals and Energy Chief Director of Nuclear 
Energy Tseliso Maqubela said Minister Buyelwa Sonjica would shortly 
launch the new nuclear energy policy which was adopted by the 
cabinet last month.  Maqubela said the major change between the 
final policy (not yet released) and the draft released for public 
comment last August (available on the SA DME web-site at 
http://www.dme.gov.za/energy/documents.stm) was the removal of a 
proposal to set up an agency devoted to nuclear security.  He said 
this function should be performed by the national nuclear regulator, 
in line with international practice.  "Nothing has really changed 
except the wording in some cases to indicate that nuclear will not 
be the only energy developed," Maqubela said.  Flexibility has been 
built into the policy approach to accommodate the development of new 
technologies and changing market conditions.  Maqubela said that it 
was no longer the case that the South African government had 
quantified a fixed target for nuclear of 25% of total power 
generation by 2025-2030 (from existing 6%).  "We don't want to tie 
ourselves down - it could be that clean coal technology or methods 
for carbon capture and storage are developed," he added.  Eskom is 
assessing bids from Westinghouse and Areva for construction of the 
first 3,000 MW tranche of a new nuclear power plant, but the 
decision on the preferred supplier has been deferred to September 
from June.  Meanwhile, the government has enlisted the aid of a 
brand consultant, Freedthinkers, to give the image of nuclear power 
in South Africa a make-over and attempt to unearth and correct 
misperceptions and apprehensions on the part of the public. 
Opponents fear that the move may be an attempt to short circuit 
public consultation as the government presses ahead with its program 
to build up to a dozen more conventional plants and potentially 
twice that number of pebble-bed modular reactors.  (Engineering 
News, Business Day, Business Report, July 11, 14, 2008) 
 
--------------------------------------------- --- 
SA's Engen Snaps up Shell's Business in Zimbabwe 
--------------------------------------------- --- 
 
¶14. (U) SA petroleum products group Engen announced it had concluded 
a sale and purchase agreement to buy Shell's downstream business 
interests in Lesotho and crisis-torn Zimbabwe, where Engen said it 
was taking a long-term view that the economy would recover.  Engen 
has also recently acquired Shell's downstream interests in Gabon and 
the DRC.  Engen's spokeswomen said the recent acquisitions were in 
support of the company's increased focus on sub-Saharan Africa.  In 
Zimbabwe, Engen - owned by Malaysian oil company Petronas (80%) and 
black economic empowerment group Worldwide Africa Investment 
Holdings - would purchase Shell's share in a joint venture with BP. 
 Engen CEO Rashid Yusuf said, "While Zimbabwe's economy has declined 
sharply over the last decade, it still has good infrastructure which 
we believe will form the basis of renewed economic growth, once the 
current political situation is resolved."  A Shell spokesman said 
the deals were consistent with the multinational's "more upstream 
and profitable downstream strategy, and the company remains 
Qand profitable downstream strategy, and the company remains 
committed to Africa."   (Business Day, July 11, 2008) 
 
BOST