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FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 5203
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEHJO/AMCONSUL JOHANNESBURG 8239
RUEHTN/AMCONSUL CAPE TOWN 5849
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UNCLAS SECTION 01 OF 05 PRETORIA 001633 
 
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 JULY 25, 2008 
ISSUE 
 
PRETORIA 00001633  001.2 OF 005 
 
 
¶1. (U) Summary.  This is Volume 8, issue 30 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- BER Predicts Slower Economic Growth and an Easing in 
  Interest Rate Hikes 
- Treasury Sticks to 4% Growth Forecast 
- Manuel Does Not See Tax and Tariff Reductions as a 
  Solution to Price Pressures 
- Wage Hike in the Textile Industry May be Positive for 
  Inflation 
- Road Accidents Dent Economy 
- Labor Strikes over Power Crises Halts Auto Production 
  throughout SA 
- Renault-Nissan Investment Welcomed by Struggling Auto 
  Industry 
- Eskom Welcomes Front-loading of Government Loan 
- Eskom Worried about Rising Costs and Plant Outages 
- Vodacom Looks Beyond SA to Drive Growth 
- Chinese Company Seeks to Become Leader in African ICT 
  Skills Development 
End Summary. 
 
------------------------------------------ 
BER Predicts Slower Economic Growth and an 
Easing in Interest Rate Hikes 
------------------------------------------ 
 
¶2. (U) The University of Stellenbosch Bureau for Economic Research 
(BER) released its third quarter prospects report, which predicted a 
tough road for the South African economy.  The report also indicated 
that new weighting changes to the CPIX (consumer price index minus 
mortgage costs) inflation measure would provide "some relief". 
Growth would slow further as the effect of interest rate hikes in 
April and June fed through to the economy.  In light of the 
deteriorating growth outlook, BER Economist Hugo Pienaar forecasted 
an end to the current interest rate raising cycle and predicted the 
next interest rate reduction would be in June 2009.  Nedbank's Chief 
Economist Dennis Dykes expressed similar views on the outlook for 
interest rates in 2009.  Growth in gross domestic product (GDP) fell 
sharply from more than 5% in the fourth quarter of 2007 to 2.1% in 
the first quarter of 2008.  Pienaar said the disappointing first 
quarter growth figure was "unlikely to be a once-off event".  The 
BER is revising its 2008 annual GDP growth forecast down from 3.4% 
to 3.2%, while next year's growth forecast is downgraded from 3.8% 
to 3%.  Pienaar attributed the downward revision to slower private 
consumption as well as a slowing in total fixed investment.  He said 
there was a strong correlation between business confidence and 
growth.  He cited a 19-point plunge in the business confidence index 
in the first quarter and a further 3-point fall in the second, as 
one of the reasons for downgrading growth prospects.  The 
two-quarter fall from 67 to 45 points shows that more than half the 
respondents are dissatisfied with the business environment.  The 
BER's latest forecast comes after a 5 percentage point upward 
adjustment in the Reserve Bank's official repo rate, since June 
2006, which has pushed benchmark mortgage and interest rates to 
15.5%.  The interest rate rise came as inflation rose above the 
Reserve Bank's 3 to 6% target range.  The CPIX, the central bank's 
benchmark index, has been above the range since April 2007 and was 
10.9% in May 2008.  The BER forecasts that CPIX will peak in 
September at more than 13% and will average 11.4% this year. 
QSeptember at more than 13% and will average 11.4% this year. 
However, BER has revised its 2009 inflation forecast down from 8.1% 
to "closer to 7%", following the release of Statistics SA's new 
weights for the CPIX consumer basket next year.  Pienaar noted that 
the degree of monetary easing will depend on how sharply GDP growth 
slows next year and whether actual CPIX inflation - due to the new 
weights and/or potential sharp fall in the oil price - turns out to 
be lower than expected.  The BER analysts said the second quarter 
GDP figures should show a temporary improvement as electricity 
supply recovered.  The BER does not anticipate a recession, but 
notes that certain sectors like manufacturing and retail are likely 
to be in recession.  The large external funding requirement of the 
current account deficit also remains an important risk factor for 
the Rand.  "Combined with a projected recovery in the U.S. Dollar 
versus the Euro over the next 12 to 18 months, the Rand is 
forecasted to weaken against the greenback, but to strengthen 
somewhat against a softer Euro," noted the BER.  It forecasted the 
rand to average R8.45 per dollar during the fourth quarter, which 
would imply a 13% depreciation from the current R7.50 level. 
 
PRETORIA 00001633  002.2 OF 005 
 
 
(Business Day and Business Report, July 24-25, 2008) 
 
------------------------------------- 
Treasury Sticks to 4% Growth Forecast 
------------------------------------- 
 
¶3. (U) Finance Minister Manuel told parliament that the National 
Treasury sees no reason to revise its 4% growth forecast presented 
at the time of the February 2008 Budget, despite the deterioration 
in the global and domestic economic environment.  Manuel also 
rejected the notion that the South African economy may be heading 
for a recession, stating that "It is still too early to tell", but 
that the Treasury will keep a close eye on developments.  In the 
first quarter of 2008, real GDP growth advanced at an annualized 
pace of 2.1%, and Manuel argued that even if the economy records no 
further growth for the rest of the year, annual growth in 2008 will 
still be 2.4%.  Moreover, if growth remains at around 3% over the 
next three quarters, annual growth will be around 3.5% in 2008.  The 
marked growth slowdown in the first quarter was mainly as a result 
of electricity supply disruptions. Though some mines and large 
industrial customers continue to operate with below optimal 
electricity supplies, the overall electricity supply situation seems 
to have stabilized for now, which is likely to contribute to a 
growth rebound in the second quarter of 2008.  Most economists agree 
that talk of a recession may be premature, but nevertheless think 
that the Treasury's current 4% growth projection may be overly 
optimistic because business and consumer confidence had already sunk 
to very low levels.  (ABSA-Newsletter, July 22, 2008) 
 
--------------------------------------------- 
Manuel Does Not See Tax and Tariff Reductions 
as a Solution to Price Pressures 
--------------------------------------------- 
 
¶4. (U) Finance Minister Manuel rejected calls for lower food and 
fuel taxes in parliament, arguing that the Treasury's investigations 
found no compelling reasons for tax relief.  He noted that 19 basic 
food items are already VAT zero-rated.  These items have been 
selected to benefit the poor, but there is evidence that some 
producers and suppliers may be benefiting from the current regime. 
On the fuel levy, Manuel argued that the domestic fuel price is 
determined primarily by movements in the international oil price and 
the exchange rate. Fuel taxes play a small part since these taxes 
are specific taxes fixed for a year and they are low in comparison 
with other parts of the world. The primary sectors of the economy 
already benefit from the diesel tax rebate scheme. Moreover, a 
reduction in the fuel levy may require raising other taxes, such as 
company or individual taxes, to compensate for a revenue loss. 
There are also other issues such as changing energy consumption 
behavior, improving energy efficiency and broader environmental 
concerns that need to be considered. Although a reduction in food 
and fuel taxes may have brought a temporary reprieve, the inflation 
problem in South Africa is more broad-based than just food and fuel 
price inflation.  In May 2008, around 86% of the CPIX basket was 
rising by 6% or more, compared with just 40% in March 2007. 
Considering these pressures, and that the Reserve Bank still needs 
QConsidering these pressures, and that the Reserve Bank still needs 
to factor recent electricity tariff hikes of around 30% into their 
forecasts, there is still a risk of a further 50-basis-points 
interest rate hike in August 2008. (ABSA- Newsletter, July 22, 
2008) 
 
--------------------------------- 
Wage Hike in the Textile Industry 
May be Positive for Inflation 
---------------------------------- 
 
¶5. (U) South Africa's clothing and textile workers Union (SACTWU) 
announced that it had reached an agreement for wage increases of 
between 8% and 11% in six of the nine sub-sectors of the textile 
industry.  This increase will be backdated to July 1, 2008.  In an 
environment where the latest CPIX inflation figure was 10.9% y/y in 
May, and a peak of above 12% expected in the third quarter of 2008, 
the latest wage settlement could be viewed in a positive light. 
Moreover, CPIX clothing increased by 9.7% y/y in May, suggesting 
very little additional inflationary pressure from the wage 
settlement.  (Beeld, July 23, 2008) 
 
--------------------------- 
Road Accidents Dent Economy 
 
PRETORIA 00001633  003.2 OF 005 
 
 
--------------------------- 
 
¶6. (U) The Department of Transport reported that road accidents cost 
the economy an estimated R581 billion ($77 billion) between 1996 and 
¶2006.  The report includes the cost of injuries in its assessment of 
the economic toll of road accidents. "The estimated total costs of 
road accidents over the eleven year period give an idea of how much 
South Africa has lost out on potential production input or skills," 
the report said.  More than 13,000 people are killed on South 
African roads each year, making the country one of the most 
dangerous in the world for drivers.  Speeding, a lack of policing, 
and the high number of vehicles on the road that are not roadworthy 
are among the factors that have made South African roads unsafe. 
(Beeld, July 22, 2008) 
 
------------------------------------- 
Labor Strikes over Power Crisis Halts 
Auto Production throughout SA 
------------------------------------- 
 
¶7. (U) Carmakers in South Africa halted production on July 23, after 
a trade union federation strike kept employees away from work.   The 
Congress of South African Trade Unions (COSATU) called on its 
members in the Eastern Cape (South Africa's auto-manufacturing hub), 
Limpopo, North West and Gauteng provinces, to embark on a strike. 
This was in protest of rising power, fuel, and food prices, as well 
as over job losses stemming from the power crisis that hit the 
country in January.  Ford, Daimler, General Motors and Volkswagen 
all closed their plants in the country for the day.  Volkswagen 
South Africa employs 5,500 people, and all production-related staff 
were not at work; meaning 300 to 400 cars were lost, said 
spokesperson Bill Stephens.  Daimler, which manufactures Mercedes 
Benz C-Class luxury vehicles and Mitsubishi Triton cars in East 
London, typically produces 220 units a day, spokesperson Annelise 
van der Laan said.  The firm employs a total of 3,000 people in 
South Africa.  Ford South Africa Spokesperson Rella Bernardes said 
that it would lose production of 340 vehicles, after shutting its 
Pretoria plant, as well as the 600 engines it would have assembled. 
COSATU has called for another work stoppage on August 6. 
(Engineering News, July 23, 2008) 
 
---------------------------------- 
Renault-Nissan Investment Welcomed 
by Struggling Auto Industry 
---------------------------------- 
 
¶8. (U) Renault-Nissan announced it will invest about R1 billion in 
Nissan South Africa's assembly plant in Rosslyn, near Pretoria.  The 
investment will be for the production of a new Nissan half-ton 
pickup and the Renault Sandero.  The Sandero will be the first 
Renault vehicle to be manufactured locally.  The investment would 
increase the plant's capacity from 40,000 units per year to 68,000 
units per year in 2009.  It would create 300 new jobs in the plant 
this year.  Nissan currently has a workforce of about 1,900, after 
retrenching 410 workers last year, when a contract manufacturing 
agreement with Fiat Auto South Africa expired and production of the 
Nissan 1400 Bakkie ceased because of emission control legislation. 
The new jobs are being created at a time when the local motor 
industry is under severe pressure because of a sharp slump in sales, 
Qindustry is under severe pressure because of a sharp slump in sales, 
largely due to a series of interest rate hikes since June 2006 and 
the impact of inflationary pressures on consumers' disposable 
income.  This has led to the closure of several dealerships and 
retrenchments in the retail motor industry.  Manufacturers have been 
under pressure to align their production with new vehicle market 
demand.  General Motors South Africa reported earlier this month 
that it was planning to retrench 520 workers.  Nissan South Africa 
Managing Director Mike Whitfield said Nissan and Renault were 
reaffirming their commitment to South Africa with this manufacturing 
project.  Apart from increasing the production capacity of the 
plant, the investment would be used to adapt the two vehicles to 
right-hand drive for the domestic market and to develop the local 
components and accessories supply chain.  Local content in the 
vehicles will be 25% when production begins and will gradually 
increase.  The cars would initially be sold in the local market but 
export opportunities for both vehicles were being investigated, said 
Whitfield.  The new Nissan pickup would go on sale in October and 
sales were expected to exceed 17,000 units a year.  Renault South 
Africa Managing Director Xavier Gobille said Renault would be 
expanding its local line with products ranging from entry-level to 
 
PRETORIA 00001633  004.2 OF 005 
 
 
upper-range vehicles. This would include the launch of Renault's 
first crossover vehicle this year.  (Business Report, July 22, 
2008) 
 
--------------------------------------------- -- 
Eskom Welcomes Front-loading of Government Loan 
--------------------------------------------- -- 
 
¶9. (U) State-owned electricity producer Eskom has welcomed the 
National Treasury's decision to bring forward the disbursement of 
the R60 billion ($8.5 billion) deeply subordinated loan from 
government.  Finance Minister Trevor Manuel unveiled the details of 
the capital injection, funding of which will be accelerated over 
three years, instead of the originally-announced five years.  Manuel 
indicated that the decision to front-load the share-holder loan was 
based on an analysis of the best way "to ameliorate the negative 
impact on Eskom's balance sheet, while smoothing the impact of 
tariff increases."  "In addition to the deeply subordinated loan, 
government will consider providing guarantees to enable Eskom to 
access funding otherwise not available," National Treasury said in a 
statement.  News of the injection came as Eskom officials set off on 
a European road show, where they will map out how they plan to close 
a R150 billion ($20 billion) funding gap through borrowings on the 
South African and international capital markets.  (Engineering News, 
the Weekender, Mail & Guardian, Sunday Times, and Business Day, July 
18-22, 2008) 
 
--------------------------------------------- ----- 
Eskom Worried about Rising Costs and Plant Outages 
--------------------------------------------- ----- 
 
¶10. (U) Eskom's new chairperson Bobby Godsell announced that the 
spike in coal and diesel costs had put a massive dent in Eskom's 
bottom line for the fiscal year ending March 31, 2008.  Primary 
energy costs, accounting for 46% of Eskom's running costs, rose by 
R5 billion ($667 million) to R18 billion ($2.4 billion), compared to 
the prior year.   The appointment of the new chairperson is intended 
to help Eskom achieve a stabilization strategy it hopes will restore 
investor and public confidence.  Outgoing Chairman Valli Moosa said, 
"I'm confident the entire winter will go without any load-shedding 
whatsoever."  CEO Jacob Maroga said the power system had stabilized 
since May, but was "not out of the woods", adding that Eskom's 
reserve margin of 6% compared to the target of 15%.  "Our number one 
priority is to keep the lights on," Maroga said.  "Our second 
priority is to execute strategy and secure funding for capital 
expansion."  Eskom continues to fret about coal availability and 
prices.  Adding further to its woes, Eskom temporarily shut down 
three generating units (totaling 2,154 MW) this week: one of the 
units at its Koeberg nuclear station and coal-fired units at Majuba 
and Duvha.  Eskom warned consumers of a higher risk of load-shedding 
and again called for a reduction in demand.  Separately, Eskom 
promised to clarify the utility's approach to new connections with 
the imminent release of a comprehensive policy.  (Engineering News, 
the Weekender, Mail & Guardian, Sunday Times, and Business Day, July 
18-22, 2008) 
 
--------------------------------------- 
Vodacom Looks Beyond SA to Drive Growth 
QVodacom Looks Beyond SA to Drive Growth 
--------------------------------------- 
 
¶11. (U) Vodacom reported steady customer growth across its five 
markets, but its South African operations showed only a moderate 
rise of 0.3% to 24.9 million.  The new Vodacom CEO Pieter Uys said 
that although there were still growth opportunities in the next 18 
months, aggressive expansion in other parts of the continent and 
acquisitions for its internet operation, Vodacom Business, were 
required.  Uys is taking over from Alan Knott-Craig, who retires in 
September.  Vodacom's domestic market share fell to 54% from 55% in 
March.  Stanlib analyst Zwelakhe Mnguni said performance from South 
Africa was disappointing and was evidence that the local market was 
mature.  "The key thing is that Vodacom's market share came off by 
1%. That may not sound material but it does put them on the back 
foot in a near-saturation voice market. The South African market has 
reached a SIM-penetration rate of 96%, which is very high compared 
with other countries on the continent where the rate is in the 20% 
to 30% range," he said.  Vodacom's overall customer base grew by 
6.6% to 34.6 million, helped by businesses in Lesotho, Mozambique, 
the Democratic Republic of Congo (DRC) and Tanzania. Mnguni said 
Tanzania and the DRC seemed to be the next growth engines. "Overall 
 
PRETORIA 00001633  005.2 OF 005 
 
 
it is clear that the group still has some growth momentum but all 
the thrust comes from outside South Africa," he said.  (Business 
Report, July 23, 2008) 
 
----------------------------------------- 
Chinese Company Seeks to Become Leader in 
African ICT Skills Development 
----------------------------------------- 
 
¶12. (U) Chinese telecommunications network solutions and equipment 
provider Huawei Technologies is seeking to position itself as a 
market leader in training Africans.  The company, which reported 
total revenue of $16-billion in 2007, has been in operation for 20 
years and has 100 international branches.  Huawei manufactures and 
markets telecommunications services to South African telecoms 
companies Telkom, MTN, Vodacom, Cell C and Neotel.  Huawei Chief 
Operating Officer Xue Bo said the company has built four training 
centers across Africa over the last couple of years, with the latest 
being built in Angola.  "Over the last couple of years, more than 
4,000 students have graduated from these training centers with 
skills in telecommunications products and management," he noted. 
The company has full-time professional instructors and engineers 
conducting the training.  Huawei is also seeking to invest in 
programs focused on corporate social investment initiatives and, in 
the future, is looking to help university students get on-the-job 
training and to provide employment opportunities by establishing a 
scholarship program.  "We are aiming to position the company as a 
leading telecommunications supplier and create job opportunities in 
South Africa.  We want to encourage skills transfer, as there is 
room for development in the telecommunications industry, and the 
company wants to be a part of the solution," he added.  Huawei 
employs more than 3,000 people in Southern Africa, with 70% local 
staff.  "It is our aim to provide end-to-end solutions, network 
consultation and construction, among others," he said.  Huawei 
opened its office in South Africa in 1988 and Vodafone awarded 
Huawei the Global Supplier Award for outstanding performance in 
¶2007.  (Engineering News, July 25, 2008) 
 
BOST