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UNCLAS SECTION 01 OF 04 PRETORIA 001773 
 
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TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
PGOV, SF 
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER AUGUST 8, 2008 
ISSUE 
 
PRETORIA 00001773  001.2 OF 004 
 
 
¶1. (U) Summary.  This is Volume 8, issue 32 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- Inflation: Mboweni 'Concerned' 
- Manufacturing production recovered in June 
- COSATU Strike Impacts Economic Activity 
- 'Black Diamonds' Lose Shine 
- Consumers Feeling Pain of Increasing 
  Interest Rates 
- New Freight Rail Command Center Launched 
- Toyota to Acquire Full Ownership of South African 
  Subsidiary 
- Eskom Sets Aside Funds for Air Quality Safeguards at 
  Newest Power Station - Faces Challenges over Price Hike 
- Gold Fields in Safety Fix 
- Local Manufacturers to Benefit from Switch to Digital 
  Broadcasting 
 
End Summary. 
 
------------------------------ 
Inflation: Mboweni 'Concerned' 
------------------------------ 
 
¶2. (U) South African Reserve Bank (SARB) Governor Tito Mboweni said 
that monetary authorities are concerned because inflation in South 
Africa is outside the SARB's 3% to 6% target band.  Mboweni noted 
that initial supply-side pressures have expanded to include more 
generalized pressures. "The core inflation rate is still above the 
upper limit of the inflation target," he said.  He scotched talk 
that inflation targeting was not working and should be abandoned, 
emphasizing that it promoted accountability in the management of the 
economy, and allowed for greater policy consistency and better 
coordination.  Mboweni rejected the argument that alternative 
instruments could be used to fight inflation.  "There is growing 
consensus around the world that the pursuit of price stability is in 
the interest of sustained economic growth and development and not in 
opposition to it," said Mboweni.  (Beeld, August 6, 2008) 
 
------------------------------------------ 
Manufacturing production recovered in June 
------------------------------------------ 
 
¶3. (U) South Africa's manufacturing production rose 6.1% y/y in June 
from an upwardly revised 1.1% gain in May (previously 0.7%). The 
rebound in the manufacturing data was surprisingly out of sync with 
developments in the PMI (purchasing manager index) business 
sub-index, which recorded a sharp decline in June to 38.7 from 47 in 
May. The PMI business sub-index surveys actual production and has in 
recent months served as a good indicator of likely manufacturing 
production. The South African Reserve Bank (SARB) is unlikely to 
view the data as an indication of overall resilience in the economy. 
 Both retail and vehicles sales already offer evidence that 
consumption expenditure (which makes up about 60% of GDP) is under 
pressure from increased debt servicing costs and inflation.  Many 
analysts remain of the view that a combination of weak economic 
activity and an improved inflationary outlook will see the SARB 
leave rates on hold at the Monetary Policy Committee meeting on 
August 14.   (ABSA Capital Research, August 8, 2008.) 
 
--------------------------------------- 
COSATU Strike Impacts Economic Activity 
--------------------------------------- 
 
¶4. (U) The strike on August 6 by the Congress of South African Trade 
Unions (COSATU) over high food and fuel costs affected production 
activity throughout the country.  In the mining sector, which had 
Qactivity throughout the country.  In the mining sector, which had 
been hard hit by electricity supply disruptions earlier in the year 
and continues to operate with below-normal electricity supplies, the 
impact of the strike was mixed.  Some companies reported that around 
70% of their workers reported for work at some mines, while in other 
cases only 29% of workers went to work.  The public transport system 
was badly disrupted, which had ripple-effects throughout most 
sectors of the economy.  However, these effects may be mitigated by 
contingency plans put in place by many companies to make up for lost 
production.  (ABSA-Newsletter, August 7, 2008) 
 
--------------------------- 
 
PRETORIA 00001773  002.2 OF 004 
 
 
'Black Diamonds' Lose Shine 
--------------------------- 
 
¶5. (U) Research shows that rising interest rates, inflation, and 
food and fuel prices have affected members of the emerging black 
middle class the most.  According to a survey by the TNS Research 
group, 10% of the black middle class have had items repossessed in 
the last 12 months.  Twenty percent of those surveyed said they 
never seem to be able to pay off their debts while half had 
outstanding bills with retailers.  "Black diamonds are starting to 
feel the pinch of the credit meltdown," said the survey.  The 
emergence of black consumers with significant spending power has 
been one of South Africa's proudest post-Apartheid stories.  But the 
levels of borrowing needed to fuel a sharp rise in home and car 
ownership are now threatening the phenomenon.  (Beeld, August 7, 
2008) 
 
------------------------------------ 
Consumers Feeling Pain of Increasing 
  Interest Rates 
------------------------------------ 
 
¶6. (U) Evidence of a downturn is widespread as many consumers have 
overreached themselves and are struggling to make payments, now that 
the prime rate is at 15.5%.  According to Johannesburg-based Aucor 
Auctioneers, the firm is being handed approximately 6,000 
repossessed vehicles every month by banks, ranging from Aston 
Martins to sports utility vehicles.  The impact is also being seen 
in the new car market.  The latest figures from the National 
Association of Automobile Manufacturers of South Africa (NAAMSA) 
show that sales of new vehicles slumped by nearly 26% in June 2008, 
to the lowest level in more than four years.  Research also shows 
that almost 2,000 homeowners are having their property repossessed 
every month.  South African Banking Association Chief Executive Cas 
Coovadia said the biggest losers are those trying to secure a 
foothold at the top.  "The information we receive from banks 
indicates that the upper class with home loans from R2-5 million 
($270-$670 thousand) were the worst affected," said Coovadia. "These 
people have accumulated a string of expensive assets and are now 
finding it hard to maintain their lifestyles," he added.  According 
to the Bureau of Market Research at the University of South Africa, 
household debt surged from R290.7 million or 39% of GDP in 1998 to 
R1.04 billion or 48% of GDP in the first quarter of 2008.  (Beeld, 
August 7, 2008) 
 
---------------------------------------- 
New Freight Rail Command Center Launched 
---------------------------------------- 
 
 
¶7. (U) Minister or Public Enterprise Alec Erwin inaugurated the new 
Transnet Freight Rail (TFR) national operation centre (NOC) in 
Johannesburg on August 4.  The state-of-the-art facility has been 
modeled on operation centers run by U.S. Burlington Northern and 
Union Pacific rail companies.  The NOC will operate 24 hours a day 
and provide real-time information on cargo movement, with the 
management of infrastructure, the rolling stock, and maintenance 
"under one roof" for the first time.  TFR CEO Siyabonga Gama said 
that the NOC was central to TFR's plans to materially improve the 
reliability and availability of the country's rail network. 
Transnet CEO Maria Ramos added that the NOC was also integral to 
QTransnet CEO Maria Ramos added that the NOC was also integral to 
Transnet's "ambitious" growth targets. Transnet hopes to raise its 
rail volumes from 181 million tons to over 238 million tons by 
2012/13, or 31.5% over the three-year period.  To achieve this, the 
TFR's troubled general freight business (GFB) would have to grow at 
6.5% a year, while iron-ore volumes would need to rise by 7.3% and 
coal by 3.6%.  "It is critical that we get our freight system 
efficient," Erwin said, noting, "It's critical that we begin to 
shift some of the freight off the roads and back onto rail.  And, it 
is critical that we provide a responsive and sophisticated service 
to the many customers in South Africa." He said that since South 
Africa is "a long way from the world's major markets," the 
efficiency of the transport sector would be crucial to ensuring that 
its companies remained competitive.  While few road users would 
disagree with Erwin's sentiments, the TFR could face resistance from 
road haulers, who have already shown themselves to be far more agile 
and competitive than Transnet.  There is concern that, while haulers 
have to compete aggressively, government policy allows TFR to remain 
a monopoly for years to come.  The bigger Transnet group stated that 
 
PRETORIA 00001773  003.2 OF 004 
 
 
it planned to extract "synergies" from its control of South Africa's 
rail, ports, and pipeline infrastructure.   (Business Day, July 28, 
2008) 
 
-------------------------------- 
Toyota to Acquire Full Ownership 
of South African Subsidiary 
-------------------------------- 
 
¶8. (U) Toyota Motor announced that it would gain full ownership of 
its South African subsidiary by late August.  Toyota reached an 
agreement with its joint venture partner Wesco Investments to 
acquire the remaining 25% stake in Toyota South Africa, worth about 
R2.03 billion ($274 million).  By making the South African unit a 
wholly-owned subsidiary, Toyota plans to boost local production, 
sales, and exports.  Toyota South Africa sold 153,000 units last 
year.  (Business Report, August 6, 2008) 
 
------------------------------------------ 
Eskom Sets Aside Funds for Air Quality 
Safeguards at Newest Power Station - Faces 
Challenges over Price Hike 
------------------------------------------ 
 
¶9. (U) State power utility Eskom is finalizing tenders for an up to 
R5 billion ($700 million) investment into flue gas desulphurization 
(FGD) technology for its Kusile power station (formerly known as 
Bravo), being built near Witbank, in Mpumalanga.  This first-time 
deployment of FGD technology in South Africa would be used to remove 
sulfur from the exhaust flue gases.  "Eskom is fitting FGD to the 
Kusile plant as an atmospheric emission abatement technology to 
ensure compliance with air quality standards," CEO Jacob Maroga 
announced on August 5.  The eagerly awaited 4,818 MW coal-fired 
power station will be ramped up in six 803 MW chunks between 2013 
and 2017, hopefully resolving South Africa's power woes as it 
reaches completion.  The water-intensive FGD technology was chosen 
in a trade-off between adding to the plant's water footprint and 
reducing atmospheric emissions in an area already suffering from a 
high level of air pollution from coal-fired power stations.  Eskom 
has signed a letter of intent with Anglo Coal South Africa to supply 
the plant with 17-million tons of coal over its 47-year life.  The 
coal would be supplied through Anglo's empowerment subsidiary Anglo 
Inyosi Coal, with first coal deliveries expected in 2011, well 
before the start-up of the first unit in 2013.  Anglo Coal indicated 
that the coal would likely be transported by a dedicated conveyor 
system, consistent with the intention of the government, Eskom, and 
Transnet to diversify logistical solutions to relieve pressure on 
the province's road network.  Eskom executives also completed their 
road show tour last week of Europe's financial capitals, touting 
their detailed recovery plan, including the regulator's approval of 
a 27% hike in electricity prices this year.  (Engineering News, 
Mining Weekly, Business Report, August 6, 2008) 
 
------------------------- 
Gold Fields in Safety Fix 
------------------------- 
 
¶10. (U) Global gold producer Gold Fields will lose about 12% of its 
South African production in the current financial year after a 
safety check revealed that it needed to make substantial repairs to 
the main shaft at its 2,000-meter deep Kloof Mine.  Safety is a top 
priority for mining groups in South Africa due to a spate of mining 
Qpriority for mining groups in South Africa due to a spate of mining 
deaths in the past year.  One of the worst accidents happened in 
May, when a lift cable snapped at Gold Fields' South Deep Mine, 
killing nine workers.  New CEO Nick Holland said that a review of 
infrastructure at the entire group's South African mines showed that 
the steelwork at the main shaft at 40-year old Kloof Mine had 
deteriorated substantially and needed to be repaired.  Analysts 
noted that this significant closure due to maintenance backlog was 
unprecedented in South Africa and could generate a "knock-on" effect 
for more costs industry-wide, but they were generally positive about 
Gold Field's decision.  Meanwhile, Gold Fields announced that it had 
switched to fully-mechanized mining at its 3,000-meter South Deep 
Mine, necessitating a lay-off of 1,885 workers.  A National Union of 
Mineworkers spokeswoman said the workers refused to be redeployed to 
Kloof and Beatrix Mines because of "the company's poor safety 
record."  She said, "They opted to go home rather than risk their 
lives there."  The government has yet to publish the results of the 
safety audit called for by President Thabo Mbeki, which was due for 
 
PRETORIA 00001773  004.2 OF 004 
 
 
release last month.  (Mining Weekly, the Weekender, Business Report, 
August 3-4, 2008) 
 
-------------------------------------------- 
Local Manufacturers to Benefit from Switch 
to Digital Broadcasting 
-------------------------------------------- 
 
¶11. (U) Minister of Communications Ivy Matsepe-Casaburri announced a 
cabinet decision to approve the long-awaited Broadcasting Digital 
Migration (BDM) policy.  The policy provides a framework for South 
Africa to start the migration from analogue to digital broadcasting 
starting November.  She said the Cabinet had also approved the 
manufacturing of set-top-boxes (STBs), which would allow households 
with analogue television sets to convert the digital signal to 
analogue signal.    Matsepe-Casaburri said the migration from 
analogue to digital broadcasting would boost the development of 
South Africa's local electronics manufacturing sector, and that a 
number of companies able to manufacture STBs had already been 
identified.  The local manufacturers had the potential to 
manufacture up to 5.6 million STBs a year, which also created export 
opportunities.  The installation, repair, and sale of the STBs would 
also create jobs.  The STBs were likely to cost between R400 ($54) a 
box and R700 ($95) a box and the government would provide an 
ownership support program to fund up to 70% of the cost of an STB 
for about five-million of the poorest television-owning households. 
This would cost government R2.45 billion ($331 million) during the 
three-year dual-illumination period.  This funding could come from 
the universal service and access fund, which telecommunications 
companies and broadcasters contribute to.  The BDM policy was in 
line with a decision taken by the International Telecommunication 
Union that all European, African and Middle Eastern countries should 
migrate from analogue to digital broadcasting services by 2015.  In 
2007, Cabinet decided that the analogue signal to be switched-off on 
November 2011.  The Department of Communications stated that it was 
on track to switch-on the digital signal on November 1, 2008, and 
said it would provide digital broadcasting and mobile television for 
the 2010 FIFA World Cup.  Digital broadcasting would allow for the 
provision of services in multiple languages, and would give the 
public access to government information and services.  (Business Day 
and Engineering News, August 7-8, 2008) 
 
BOST