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UNCLAS SECTION 01 OF 04 PRETORIA 001822 
 
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 AUGUST 15, 
2008 ISSUE 
 
PRETORIA 00001822  001.2 OF 004 
 
 
¶1. (U) Summary.  This is Volume 8, issue 33 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- MPC Leaves Interest Rate Unchanged 
- SADC to Launch Free Trade Area 
- Green Rating System for SA Property Market 
- Transnet Considers Enlarging Diesel 
  Locomotive Order 
- Transnet Proposes Development of 
  Dedicated Freight Ring Project 
- Moody's Downgrades Eskom and Maintains Negative Outlook 
- Eskom Expected to Seek Funds from World Bank for 
  Expansion Program 
- Koeberg Nuclear Unit Resumes Operation 
- DME Wins Turf Battle - Titanium Miners Benefits 
- Government Promotes Call Centers 
- ICT Sector Growth Likely to Be Policy Driven 
End Summary. 
 
---------------------------------- 
MPC Leaves Interest Rate Unchanged 
---------------------------------- 
 
¶2. (U) The South African Reserve Bank (SARB's) Monetary Policy 
Committee (MPC) has left the policy interest rate (the repo rate) 
unchanged at 12%, with the prime lending rate remaining at 15.5%. 
Few analysts were surprised, given the sharp slowdown in consumer 
demand, the soaring cost of debt, and falling asset prices. 
Explaining the decision, SARB Governor Tito Mboweni said, "The 
economy is showing signs of distress, and a lot of folks are in 
distress."  Nevertheless, Mboweni warned against complacency, as 
CPIX inflation (CPI less mortgage interest) is expected to peak at 
13% in the third quarter of 2008.  Inflation is then expected to 
decline gradually and to fall below the upper end of the inflation 
target range in the second quarter of 2010.  (Beeld and Business Day 
August 14-15, 2008) 
 
------------------------------ 
SADC to Launch Free Trade Area 
------------------------------ 
 
¶3. (U) The 14-country Southern Africa Development Community (SADC) 
will launch a free trade area at a summit hosted by South Africa 
this weekend.  The intention to become a free trade area was 
originally decided in Maseru, Lesotho in 1996.  The trade protocol 
signed in Maseru came into effect in September 2000, with an 
eight-year time-line to create the free trade area.  Members are 
expected to approve a road map towards a customs union at this 
latest summit.  Minister of Trade and Industry Mandisi Mpahlwa said 
a study commissioned by SADC showed that since the Maseru decision, 
85% of trade among the SADC countries had been liberalized, and 
would be fully tariff-free by 2012.  "But regional economic 
integration is not only about the removal of tariff barriers, but 
also addressing non-tariff barriers," Mpahlwa said.  He added that 
the launch of the free trade area is not an end in itself; but the 
beginning of a process to build productive and trade capacity, 
improve the competitiveness of industries, and address the supply 
side constraints that inhibit the region from benefiting from better 
terms of trade in the region.  (Beeld, August 14, 2008) 
 
-------------------------- 
Green Rating System for SA 
Property Market 
-------------------------- 
 
¶4. (U) The Green Building Council of South Africa (GBCSA) will 
launch the first environmental rating system for the country's 
property market.  GBCSA will launch Green Star South Africa at its 
Qproperty market.  GBCSA will launch Green Star South Africa at its 
inaugural conference in November 2-4 2008.  The rating system is 
modeled on the Australian, UK and U.S. systems, which are 
characterized by rigorous certification processes.  GBCSA CEO 
Nicolas Douglas said Green Star SA will have several distinctive 
rating tools which would be able to rate different property sectors 
such as residential, office and public buildings, hotels, and 
shopping centers.  The first phase of the ratings system will target 
office buildings due to industry demand.  Council Chairman Bruce 
Kerswell said "Green Star is a crucial first step in bringing an 
effective, industry-driven initiative to South Africa".  Douglas 
 
PRETORIA 00001822  002.2 OF 004 
 
 
noted from international experience that green buildings have higher 
rents, better occupancy rates, and perform better operationally. 
(Business Day, August 13, 2008) 
 
---------------------------- 
Transnet Considers Enlarging 
Diesel   Locomotive Order 
---------------------------- 
 
¶5. (U) State-owned freight logistics and transport group Transnet is 
reported to be considering the expansion of its purchase of diesel 
locomotives.  Transnet is in the midst of tender negotiations with 
U.S.-based Electromotive Diesel (EMD) for 212 diesel locomotives 
valued at more than R6 billion ($780 million) and is reported to 
have included an option to expand that procurement to 400 new diesel 
locomotives.  CEO Maria Ramos said the tender process was well under 
way for the 212 diesel locomotives and that any enlargement would be 
pursued on the basis of a supportive business case.  It was unclear 
as to what such a move would mean for the group's five-year, R80 
billion ($10.4 billion) capital-investment program, for which it 
would need to raise R36.6 billion ($4.8 billion) on the capital 
markets over the next three years to close an anticipated funding 
gap.  Rail-related projects comprised nearly half, or R38 billion 
($4.9 billion), of the group's total investment plan.  The existing 
procurement plan for 416 locomotives makes up the lion's share of 
that budget: 110 new dual-voltage locomotives for the expansion of 
the coal line; 44 new locomotives for the initial expansion of the 
iron-ore export channel; 50 "like-new" EMD diesel locomotives; and 
212 new EMD diesel locomotives for use primarily in the general 
freight business (GFB).  The investment plan, and its possible 
enlargement, is in line with what Ramos had dubbed the group's 
strategic shift "from turnaround to growth."  This new strategy 
emphasizes the potential synergies between Transnet's port, rail, 
and pipeline units.  More specifically, it seeks to expand the role 
of Transnet Freight Rail, which had lost market share to road 
transport over the past two decades.  (Engineering News, August 12, 
2008) 
 
-------------------------------- 
Transnet Proposes Development of 
Dedicated Freight Ring Project 
-------------------------------- 
 
¶6. (U) The Transnet 2008 annual report proposes the creation of a 
"Gauteng freight ring" project to eliminate competition for limited 
rail capacity in the province.  The report noted that since 
"passenger services can only be delayed for short periods of time, 
freight is (currently) expected to play a secondary role."  To 
address this challenge, Transnet has developed a plan for the 
creation of a dedicated freight ring that will function 
independently from commuter traffic.  The benefits would include 
uninterrupted flow of freight through Gauteng and the alignment of 
future industrial growth points with terminal positions.  The group 
said the project would be phased in over a 10 to 15-year period 
after critical bottlenecks are addressed.  (Engineering News, August 
12, 2008) 
 
-------------------------------------- 
Moody's Downgrades Eskom and Maintains 
Negative Outlook 
-------------------------------------- 
 
¶7. (U) Moody's downgraded the local currency rating of state-owned 
Q7. (U) Moody's downgraded the local currency rating of state-owned 
utility Eskom by four levels, from A1 to Baa2 (the second lowest 
investment grade).  This downgrade was the result of:  deterioration 
in Eskom's stand-alone credit profile; the negative financial impact 
of lower-than-requested tariff changes recently awarded by the 
national regulator; and an assessment of financial support by the 
government.  National Treasury announced last month that it would 
fast-track disbursement of R60 billion ($7.8 billion) of fiscal 
support to Eskom, and would consider providing guarantees "to enable 
Eskom to access funding otherwise not available."  In addition to 
the local currency rating downgrade, Moody's also lowered the 
foreign currency rating by three levels, from A2 to Baa2.  Analysts 
think that other rating agencies are likely to follow Moody's lead, 
but believe that Eskom's investment grade rating status will be 
maintained.  Deputy Finance Minister Jabu Moleketi also said he 
expected Standard & Poor's and Fitch Ratings would follow Moody's in 
downgrading Eskom's credit rating.  (ABSA Capital Research, Business 
 
PRETORIA 00001822  003.2 OF 004 
 
 
Day, and Engineering News, August 13, 2008) 
 
--------------------------------- 
Eskom Expected to Seek Funds from 
World Bank for Expansion Program 
--------------------------------- 
 
¶8. (U) Eskom might seek to borrow up to $1 billion a year from the 
World Bank over the next five years as the utility adjusts its 
funding strategy to cope with difficult global markets and recent 
credit ratings downgrades.  These loans, which would be backed by 
government guarantees, would be the largest yet extended by the 
World Bank to South Africa.  The World Bank could also help with 
short-term overdraft-type facilities that Eskom could draw on if it 
needed cash.  News of talks with the World Bank emerged after rating 
agency Moody's downgraded Eskom's credit rating, a move likely to 
raise the cost of the R150 billion ($19.5 billion) Eskom planned to 
borrow to help fund its expansion program.  The utility originally 
had planned to borrow about 60% of this amount on foreign markets, 
but would moderate its plans for now.  Eskom Finance Director 
Bongani Nqwababa said Eskom was "rechecking" it's funding strategy 
and would likely focus more on borrowing locally, from development 
finance agencies such as the World Bank and African Development 
Bank, and from export credit agencies.  The crunch for Eskom is 
expected to be mainly in the next five to six years as it ramps up 
spending on its two new coal-fired power stations.  Its bankers are 
putting together a foreign syndicated loan.  Eskom is also in talks 
with the German export credit agency on a $700 million deal related 
to boilers Hitachi Europe will supply to its new coal-fired power 
stations.  (Business Day and Business Report, August 13, 2008) 
 
-------------------------------------- 
Koeberg Nuclear Unit Resumes Operation 
-------------------------------------- 
 
¶9. (U) Eskom announced that a unit of the Koeberg nuclear power 
plant that was shutdown in July after a hydrogen leak on the 
generator's cooling system has returned to service.  The unit 
started generating electricity just before midnight on August 13, 
and Eskom stated that the plant would operate at full capacity by 
August 15.  Eskom initiated a controlled shutdown of the unit on 
July 21.  Chief Generations Officer Brian Dames said the shutdown 
had placed strain on the national power grid, particularly in the 
Western Cape.  "The increased use of the two new Open Cycle Gas 
Turbine (OCGT) stations in the Cape, together with electricity 
savings, resulted in the supply of electricity continuing 
uninterrupted during the period when the Koeberg unit was out of 
service," said Dames.  (Engineering News, August 14, 2008) 
 
------------------------ 
DME Wins Turf Battle - 
Titanium Miners Benefits 
------------------------ 
 
¶10. (U) A twelve-year old turf battle between the Department of 
Minerals and Energy (DME) and the Department of Environmental 
Affairs and Tourism (DEAT) came to an end when DME approved titanium 
dune mining on the Wild Coast.  The DME granted Australian mining 
company Mineral Commodities (MRC) rights to extract titanium from a 
part of the Xolobeni Mineral Sands project located on the Indian 
Ocean coast.  The sand dunes are reported to contain over 346 metric 
QOcean coast.  The sand dunes are reported to contain over 346 metric 
tons of titanium, with an estimated value of R11 billion ($1.46 
billion).  DME spokesperson Sputnik Ratau was adamant that decisions 
on mining applications should not be driven "only [by] environmental 
issues." DEAT and the Sustaining the Wild Coast group are displeased 
with the decision and argue that the mining project will cause 
irreparable harm to the ecosystem, which is of international 
stature.  They are also concerned that the environmental, land, and 
mineral rights of local inhabitants will be violated.  Observers 
maintain that this victory could be DME's last one before the 
National Environmental Management Act is amended to make DEAT the 
ultimate authority to oversee mining applications.  (Business 
Report, August 7, 2008) 
 
-------------------------------- 
Government Promotes Call Centers 
-------------------------------- 
 
¶11. (U) Department of Trade and Industry (DTI) Minister Mandisi 
 
PRETORIA 00001822  004.2 OF 004 
 
 
Mpahlwa announced that interest in South Africa's business 
processing and outsourcing (BPO) sector remained high with a new 
600-seat call center planned for the Free State.  He described the 
BPO sector as one of the "low-hanging fruits" in which government 
was implementing its industrial policy.  The South African 
Government (SAG) views the BPO sector and call centers as effective 
job creation vehicles, particularly in poor rural areas.  In July, 
President Thabo Mbeki reported that BPO investments worth R658 
million ($85 million) have been made, and that the sector had 
created 9,132 jobs.  The SAG provides training to unemployed 
students and graduates through the Monyetla work readiness inception 
program, and hopes to train 30,000 learners over a four-year period 
through the program.  The first batch of 1,000 trainees have already 
been absorbed by the industry, and the SAG would be training a 
further 2,000 people this year.  Work in establishing call centers 
in far-flung areas had gotten off to a good start, Mpahlwa said, 
stressing that the momentum could be sustained.  ABSA Bank recently 
announced that it had become the first investor in the BPO cluster 
of the new Coega Industrial Development Zone, with an investment 
that would create 94 new jobs.  In 2007, TeleTech established a call 
center in Cape Town under the DTI's BPO incentive program.  Mpahlwa 
expected the BPO sector to grow globally by 50% a year over the next 
four years.  (Engineering News, August 11, 2008) 
 
------------------------ 
ICT Sector Growth Likely 
to Be Policy Driven 
------------------------ 
 
¶12. (U) Industry advisory firm BMI TechKnowledge explained that, 
while Africa's mobile market had been growing, internet and 
broadband penetration rates remained low.  It asserted that 
regulatory interventions could bring down prices, improve services 
availability, and enable growth.  The firm cited local loop 
unbundling, access to international gateways, the legislation of 
Voice-over Internet Protocol (VoIP), as well as convergence, as 
regulatory trends that could improve the continent's access to 
Internet and broadband services.  BMI TechKnowledge ICT Research 
Director Brian Neilson said that fixed-mobile convergence was one of 
the trends that would start affecting competition within the sector, 
and would subsequently drive down prices.  Neilson also said. 
"Broadband is the new growth area which [operators] need to take 
note of."  A recent report showed that more than $6 billion would be 
spent on ten submarine and terrestrial fiber-optic cable 
infrastructure projects in Africa over the next two years.  Neilson 
acknowledged that Africa could experience a bandwidth oversupply if 
all ten of the planned projects came on stream:  he explained that 
these cables were designed with a combined capacity of ten terabits 
a second, while demand from Africa was only expected to reach two 
terabits a second by 2019.  Nevertheless, Africa needs some of these 
cables to ensure that demand did not outstrip supply.  For example, 
South Africa needs additional bandwidth capacity to meet the digital 
broadcasting requirements for the 2010 FIFA World Cup.  According to 
Neilson, only four projects were likely to succeed: privately-owned 
QNeilson, only four projects were likely to succeed: privately-owned 
SEACOM, the East Africa Submarine Cable System (EASSY), the East 
Africa Marine System (TEAMS) consortiums, and the South African 
Government-led Infraco African West Coast Cable (AWWC).  He expected 
the NEPAD-led Uhurunet project to only come on stream at a later 
stage.  (Engineering News and Business Report, August 12-13, 2008) 
 
BOST