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TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
PGOV, SF 
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER SEPTMEBER 26, 
2008 ISSUE 
 
PRETORIA 00002136  001.2 OF 006 
 
 
¶1. (U) Summary.  This is Volume 8, issue 39 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- Economic Policies Expected to Remain 
  Consistent under Mothlanthe 
- Record CPIX Increase in August 
- Fears of Retail Recession Increase 
- Ford and GM to Reduce SA Workforce 
- BMW to Announce 3-Series Production 
- Eskom Walks Timing and Funding Tightrope 
  as Nuclear Decision Nears 
- Eskom Considers Other Power Stations 
  and Renewable Energy 
- PetroSA's Coega Refinery May Treat 
  Venezuelan Heavy Crude 
- Political Change Could Deter Telkom Plans 
- SAG to Appeal Court Ruling and Pursue 
  "Managed Liberalization" 
- Trump Enters SA Market 
- SA and Brazil to Improve Air Connections 
- Nationwide to Enter Full Liquidation 
End Summary. 
 
----------------------------------------- 
Economic Policies Expected to Remain 
Consistent under Mothlanthe 
----------------------------------------- 
 
¶2. (U) Newly elected President Kgalema Motlanthe moved quickly to 
reassure South Africa and the world that there would be no policy 
changes by his new interim administration.  "Mine is not the desire 
to deviate from what is working.  It is not for me to reinvent 
policy.  Nor do I intend to reshape either cabinet or the public 
service," Motlanthe emphasized.  On economic policy, ANC president 
Zuma also confirmed that "economic policies will remain stable, 
progressive and unchanged", which is in line with industry analysts' 
belief that there will not be any dramatic policy shifts in the 
coming weeks.  However, some policies such as inflation targeting 
are already under the spotlight and are likely to be reviewed after 
the 2009 elections.  A number of cabinet ministers, including 
Finance Minister Manuel, resigned on September 23 in a show of 
respect for ousted President Thabo Mbeki.  Manuel's resignation took 
the markets by surprise, with the rand plummeting 2.5% and the yield 
on 2015 government bonds surging by 20 basis-points to 9.12%. 
However, some market recovery occurred after Manuel confirmed that 
he was willing to serve in the new administration.  The rand also 
gained ground against most major currencies, particularly against 
the dollar because of turmoil in the U.S. banking and financial 
sector, after Motlanthe was sworn-in on September 25.  On the future 
of fiscal policy, Manuel said that significant changes to the budget 
are unlikely and that economic policies decided upon at the ANC 
Conference at the end of 2007 continued to inform a number of 
issues.  Manuel added that the release of the Medium Term Budget 
Policy Statement was proceeding according to plan and would be 
released on October 21.  ABSA Capital expects continued rand 
volatility and some weakness on domestic developments, but that 
weakness is likely to be tempered by international market 
developments and the potential for large foreign direct investment 
inflows in coming weeks.  (ABSA Capital and Business Day, September 
25-26, 2008) 
 
------------------------------ 
Record CPIX Increase in August 
------------------------------ 
 
¶3. (U) South Africa's targeted consumer price index inflation (CPIX) 
jumped from 13.0% in July to a record 13.6% y/y in August.  The 
Qjumped from 13.0% in July to a record 13.6% y/y in August.  The 
increase beat forecasts and is clouding the interest rate outlook in 
South Africa.  Food, fuel, and electricity price increases were once 
again the main drivers of CPIX inflation, with the rise in the food 
component accelerating from 18.5% in July to 19.2% y/y in August. 
The shift in the property tax survey from July to August, which was 
based on new property valuations in many metropolitan areas, also 
added to inflationary pressures.  The South African Reserve Bank 
(SARB) had previously predicted that CPIX would peak at an average 
13% in the third quarter of 2008.  SARB Governor Tito Mboweni now 
believes that inflation will remain higher than expected, despite 
changes to the consumer price basket which go into effect next year. 
 
PRETORIA 00002136  002.2 OF 006 
 
 
 "Our simulations indicate inflation will still be higher than 
expected," Mboweni noted.  He did not expect inflation to reach the 
targeted 3-6% band until the second quarter of 2010.  The SARB's 
Monetary Policy Committee (MPC) has raised interest rates by 500 
basis points since June 2006 in attempts to bring CPIX back down to 
the targeted band.  However, the MPC left the key repo rate 
unchanged at 12% last month, citing an improved long-term inflation 
outlook.  Analysts believe the SARB will leave the interest rate 
unchanged for the remainder of the year, with possible interest rate 
cuts in 2009 as the impact of base effects and changes in the 
consumer price basket become clearer.  (ABSA Capital and Engineering 
News, September 23, 2008) 
 
---------------------------------- 
Fears of Retail Recession Increase 
---------------------------------- 
 
¶4. (U) Retail sales fell 4.6% in July compared with the same month 
last year.  This is the sharpest annual fall since records began a 
decade ago, fanning fears that the sector is sliding into a 
recession.  Soaring inflation, the rising cost of debt, and a sharp 
slowdown in the growth of disposable income has curbed consumer 
spending, the economy's main growth engine since 2006.  "Growth in 
real retail sales has been in negative territory for three 
consecutive months, setting the scene for a recession in the 
sector," said Standard Bank Economist Johan Botha.  "The outlook 
remains poor over the medium term ... retailers are not only 
suffering falling demand but also rising input costs, which have 
consistently impacted on profitability," he added.  Analysts 
predicted that things would get worse before they got better. 
Investec Economist Annabel Bishop explained that retail sales growth 
could tentatively turn positive in the second quarter of 2009 and 
then strengthen during the year if lower inflation and interest rate 
cuts materialize as expected.  Retail and wholesale sales are the 
economy's third-biggest sector, making up about 14% of gross 
domestic product.  (Business Day, September 25, 2008) 
 
---------------------------------- 
Ford and GM to Reduce SA Workforce 
---------------------------------- 
 
¶5. (U) Ford Motor Company South Africa and General Motors South 
Africa (GMSA) are set to reduce total workforce due to weak sales 
expectations throughout 2008 and into 2009.  Ford has cited 
increasingly difficult macro-economic pressures, including high 
interest and inflations rates for the reduction.  The rapid 
devaluation of the rand earlier this year also challenged the 
industry by increasing the cost of imported components.  The rand 
devalued by 29% against the euro and 22% against the yen in the 
first three months of 2008.  GMSA African Operations President Steve 
Koch emphasized that if the rand continued to devalue against the 
major currencies, it would put "a lot of pressure on producing cars 
in South Africa."  GMSA will reduce its workforce by 1,000 people by 
the end of December 2008.  Kock said it "is a significant move and 
we'll be at a cost competitive level in terms of our local 
manufacturing," after the reduction.  Both companies will attempt to 
achieve the workforce reduction through voluntary separation 
Qachieve the workforce reduction through voluntary separation 
packages.  Kock emphasized that the South African automotive 
industry had to improve the cost-competiveness of materials as well 
if it was to have any chance of growing the domestic sector as it 
needed to.  At current productivity levels, material costs to build 
an Isuzu pick-up at GM's South Africa plant are about 30% to 40% 
higher than the cost to produce the same vehicle in Thailand. 
Material costs accounted for more than 80% of the cost of building a 
vehicle in South Africa since a significant portion of inputs are 
imported.  South Africa tends to produce in low volumes and the lack 
of skilled employees also adds to the bill.  Koch explained that 
high material costs can be reduced by higher-volume local production 
and closer alliances between components and vehicle manufacturers - 
both of which are proposed by government's new Automotive Production 
Development Program (APDP) which is set to replace the Motor 
Industry Development Program (MIDP) that expires in 2012.  (Business 
Report and Engineering News, September 12-15, 2008) 
 
----------------------------------- 
BMW to Announce 3-Series Production 
----------------------------------- 
 
¶6. (U) BMW has agreed in principle to build its next 3-Series sedan 
 
PRETORIA 00002136  003.2 OF 006 
 
 
in South Africa, following the unveiling of the government's new 
Automotive Production & Development Program (APDP) support scheme 
for the motor industry.  BMW Chairman Norbert Reithofer explained 
that the final decision is contingent upon the signing of a 
memorandum of understanding (MOU) that confirms the terms of the new 
APDP.  Details of the APDP still have to be finalized and it will be 
approved only in mid-2009.  During a visit to South Africa in early 
September, Reithofer announced that President Thabo Mbeki and 
Department of Trade & Industry (DTI) Minister Mandisi Mpahlwa had 
promised the MOU guaranteeing investment terms.  The main provisions 
of APDP are due to start in 2013, but some investment rules will 
begin changing in 2009.  Reithofer explained that a decision on 
global production of the next 3-Series should have been made months 
ago but was postponed because of South Africa's delay in announcing 
the details of the APDP program.  He is now "comfortable" with the 
new program.  The next 3-Series sedan is due to go into production 
in Germany in 2011. If BMW South Africa wins approval, South African 
production would probably start in 2012.  Reithofer said the 
preference was for three plants - two in Germany and one in South 
Africa - to meet all export demand.  BMW's Rosslyn plant builds 
53,000 vehicles a year, 80% of which are exported. The U.S. is the 
main destination due to the Africa Growth and Opportunity Act 
(AGOA), which allows South African cars to land there duty-free.  A 
positive BMW decision would be a major boost for the APDP at a time 
when industry representatives have asserted that the DTI goal to 
build 1.2 million vehicles annually by 2020 is "visionary but 
probably unrealistic".  SA automobile and automobile parts exports 
were over $1 billion during the first six months of 2008. 
(Financial Mail, September 12, 2008) 
 
---------------------------------------- 
Eskom Walks Timing and Funding Tightrope 
as Nuclear Decision Nears 
---------------------------------------- 
 
¶7. (U) State-owned power utility Eskom is said to be on the cusp of 
making a decision on what would be its largest-ever single 
investment, the development of the Nuclear-1 project , but serious 
questions are being raised about funding and timing of the project. 
Concerns regarding growing international financial-market turmoil, 
the current overheated nature of the supply sector, and recent 
domestic political turmoil could delay the project.  The 
power-stretched, cash-stressed utility is currently evaluating bids 
for the proposed nuclear power station from two pressure water 
reactor (PWR) vendors, one from the so-called EPR Consortium, led by 
Areva of France, and another from the N-Powerment Consortium led by 
Toshiba's Westinghouse, of the U.S.  Eskom is keen to pursue a 
nuclear option as a way of diversifying its carbon-emission-heavy 
coal base.  It has indicated that up to 50% of a 40,000 MW capacity 
expansion between now and 2025 would be based primarily on PWR 
technology.  However, the funding of Nuclear-1, and any subsequent 
'fleet plan', will be challenging.  No details have emerged about 
the precise capital requirement for the initial 3,000 MW, but 
Qthe precise capital requirement for the initial 3,000 MW, but 
figures of up to R150 billion ($20 billion) have been mooted. 
Eskom's strained financial position causes such a hefty nuclear 
price tag to pose a serious dilemma for a utility that has already 
hinted at a funding gap for its five-year R343 billion ($50 billion) 
capital program, which would only include initial nuclear-related 
capex.  Adding to the quandary is the fact that Eskom is going to 
have to approach the foreign and domestic capital markets in the 
midst of what is arguably the globe's biggest financial crisis since 
World War II.  Further, Eskom has to do this against the backdrop of 
having been downgraded by Moody's and Standard & Poor's, with 
further downgrades possible from Fitch Ratings, which has not yet 
pronounced on Eskom's rating despite announcing negative outlooks 
earlier in the year.  Eskom could need to raise as much as R90 
billion ($ 11 billion) offshore, to accelerate the development of 
some 17,000 MW of new capacity by 2017, despite a plan to maximize 
local borrowings.  In addition, it will have to begin approaching 
the capital markets before the year is out and following the recent 
resignation of its Financial Director Bongani Nqwababa.  Industry 
observers note that it will still be important to make a timely 
decision to gain a spot in the production queue with either 
Westinghouse or Areva.  (Engineering News and Business Day, 
September 18-22, 2008) 
 
------------------------------------ 
Eskom Considers Other Power Stations 
and Renewable Energy 
 
PRETORIA 00002136  004.2 OF 006 
 
 
------------------------------------ 
 
¶8. (U) State-owned power utility Eskom said it was "about to start" 
with environmental impact assessments for "possible further 
coal-fired power stations" with up to 5,400 MW capacity in the 
Waterburg and Vaal areas in the Limpopo and Northern Cape Provinces. 
 Construction of the 4,788 MW Medupi coal-fired power plant in 
Limpopo and the 4,818 MW Kusile plant in Mpumalanga Province are 
already underway.  Eskom's Tony Stott said Eskom required additional 
base load capacity beyond the two plants already under construction. 
 He said it was premature to indentify the exact size of new power 
stations yet to complete pre-feasibility studies.  Eskom is also 
considering a concentrated solar power (CSP) plant or solar thermal 
plant at Upington in the Northern Cape.  Eskom Corporate Services 
Head Steve Lennon said Eskom supported finding competitive 
commercial solutions involving renewable energy.  Department of 
Minerals and Energy (DME) Chief Nuclear Director Tseliso Maqubela 
said the energy-pressed status quo did not mean South Africa would 
go nuclear or bust.  He admitted that Eskom and authorities may not 
have paid enough attention to renewable energy.  (Mail and Guardian 
and Business Day, September 19, 25, 2008) 
 
---------------------------------- 
PetroSA's Coega Refinery May Treat 
Venezuelan Heavy Crude 
---------------------------------- 
¶9. (U) PetroSA Vice President of New Ventures Jorn Falbe said last 
week that PetroSA's proposed $11 billion Coega oil refinery project 
was the last opportunity for SA to build a refinery that would 
concentrate on handling heavy crude supplies from the Atlantic 
region to maximize economic returns.  Such a refinery would source 
its crude from Venezuela, Brazil and Angola, reducing SA's 
traditional reliance on light sweet crude from the Middle East. 
This statement follows Venezuelan President Chavez recent visit to 
SA on September 2-3, which sparked renewed interest in the project. 
Chavez is believed to have an interest in the project as a means of 
both increasing the market for Venezuelan heavy crude and reducing 
Venezuela's dependence on the U.S. market for the same crude.  Falbe 
said that, contrary to perceptions, the refinery would not be 
reliant on oil supplies promised by Chavez during his visit, since 
it could also count on potential supplies from Brazil and Angola, 
which have similar heavy crude deposits.  A mission from SA will 
visit Venezuela during the week of September 22 to look into the 
possibilities of crude oil exploration (most probably in the Orinoco 
Belt) while a Venezuelan team will visit SA during the same period 
to look into the details of the proposed refinery and the use of 
bulk state-owned storage facilities at Saldanha Bay on the west 
coast. 
 
¶10. (U) Falbe said the next six months would be critical for the 
refinery project as it moves into the front-end engineer-ing and 
design (FEED) phase.  HSBC has been appointed as a financial advisor 
for the project and the pre-feasibility study has been completed by 
the KBR global engineering, construction and services company.  The 
next step will be to select and engineering partner to complete the 
Qnext step will be to select and engineering partner to complete the 
FEED study.  PetroSA began with 30 potential partners and has 
reduced this number to four unidentified "global players".  A final 
decision on the project will be made after the completion of the 
FEED study.  Falbe said PetroSA found itself in the same position 
that state power company Eskom did a few years ago when the SAG 
declined to commit to major investments in the electric power 
sector.  The implication is that if the SAG does not finance the 
project, SA will suffer refined product shortages or have to import 
these [products.  Falbe said that the refinery would be 
strategically placed to serve the rapidly growing Chinese and Indian 
markets and that the opportunity to build the refinery was "now or 
never".  Minister for Public Enterprises Alec Erwin was reportedly 
committed to drive this refinery project forward, but he submitted 
his resignation on September 23, following the unexpected 
resignation of President Mbeki on September 20.  (Business Day, 
September 15, 2008) 
 
---------------------- 
Political Change Could 
Deter Telkom Plans 
---------------------- 
 
¶11. (U) State-controlled ICT Company Telkom is preparing for the 
expected shedding of its 50% stake in Vodacom by crafting plans to 
 
PRETORIA 00002136  005.2 OF 006 
 
 
offer mobile services of its own.  By the end of the month, the 
fixed-line phone company will be rolling out a wireless network 
promising high-speed internet access and the ability to make voice 
calls using mobile phones.  Telkom needs to devise a new mobile 
strategy because its partial-ownership of Vodacom has never 
translated into a successful working partnership.  Telkom is now 
negotiating to sell 12.5% to Vodacom's other owner, UK-based 
Vodafone, for R18.75 billion ($2.3 billion).  Telkom will also 
unbundle the remaining 37.5% stake to Telkom shareholders.  The flaw 
in that plan is that it leaves Telkom without a mobile partner when 
clients are demanding a combination of fixed and mobile services. 
However, one source believes the change of power sweeping through 
the African National Congress (ANC) will scupper Telkom's plan to 
sell the Vodacom shares to Vodafone.  That is unlikely to happen, he 
believes, as the state would struggle to justify selling the control 
of such a valuable asset to a foreign entity.  Whether the 
government agrees to sell Vodacom or not, the ongoing changes in the 
government could stall any decisions for several more weeks, the 
source says.  "I don't see Telkom coming up with something magical," 
he said.  "Unless Telkom can say 'this is our new mobile strategy', 
I see no logical explanation to sell Vodacom.  It doesn't make sense 
for South Africa to sell that asset to a UK company."  The 
counter-argument is that Telkom and Vodacom have never worked well 
together.  Telkom CEO Reuben September recently said the SAG and 
Vodafone's dual ownership of Vodacom was bedeviling all three 
parties, and was not helping Telkom to grow its business.  (Business 
Day, September 25, 2008) 
 
------------------------------------- 
SAG to Appeal Court Ruling and Pursue 
"Managed Liberalization" 
------------------------------------- 
 
¶12. (U) Department of Communications (DOC) Minister Dr. Ivy 
Matsepe-Casaburri announced that she would appeal the Pretoria High 
Court's August judgment, which ruled that ICT service provider 
Altech had the right to convert its existing value-added network 
service (VANS) license into an individual-electronic communications 
network service (I-ECNS) license.  The ruling gave Altech and other 
VANS the right to develop and operate their own communications 
network, previously the preserve of large industry players such as 
Telkom, Neotel, Vodacom, and MTN.  However, Matsepe-Casaburri 
asserted that the government's "managed liberalization" policy would 
be seriously undermined if VANS licensees were allowed to obtain 
I-ECNS licenses under the current license conversion process.  DOC 
will issue a policy directive to the Independent Communication 
Authority of South Africa (ICASA) empowering ICASA to implement an 
invitation-only application process for a number of new I-ECNS 
licensees in accordance with the managed-liberalization policy.  The 
DOC is also expected to expedite an amendment to the Electronic 
Communications Act to remove any ambiguity around managed 
liberalization, and to clarify that VANS licensees were not entitled 
to I-ECNS licenses under the license conversion process.  Analysts 
said the DOC decision to appeal the court ruling granting VANS the 
Qsaid the DOC decision to appeal the court ruling granting VANS the 
right to self-provide is a major blow to the industry in South 
Africa. "If this appeal is upheld, it will be a sore blow for ICT 
competition in South Africa, which has long suffered under stifling 
legislation," said Huge Group CEO Anton Potgieter.  He added that 
the policy of managed liberalization had had limited success so far, 
and argued that there was considerable merit in the market being 
allowed to take the lead in addressing the high-cost and limited 
service access inherent in the South African ICT industry. 
(Engineering News and Department of Communications Press Release, 
September 19-22, 2008) 
 
---------------------- 
Trump Enters SA Market 
---------------------- 
 
¶13. (U) The Trump brand of hotels and residential developments is 
expected to enter the South African market through a 10-year deal 
with local property group Devland.  The joint-venture deal covers 
leisure, golf, and "condo-hotel" developments in South Africa and 
Mauritius.  It is expected to create "saleable" real estate worth 
about R5 billion ($633 million) in the first three years.  Devlan 
Director Neill Bernstein said "sleepy" South Africa would benefit 
from global creative thinkers, who could help leverage the country's 
property treasures.  Donald Trump Jr. has been touring various 
projects in Gauteng and Western Cape to assess new possibilities. 
 
PRETORIA 00002136  006.2 OF 006 
 
 
Bernstein said the partnership with the Trump group had several 
projects in the pipeline, including eight in the Western Cape area. 
Trump Jr. said it was important for the Trump group to secure its 
branding in South Africa, which related to quality and luxury.  The 
South African products would be marketed globally, but it was 
expected that 70% of the investors would be local.  (Business Day, 
September 23, 2008) 
 
---------------------------------------- 
SA and Brazil to Improve Air Connections 
---------------------------------------- 
 
¶14. (U) Brazilian airline TAM is expected to announce service to 
South Africa by the end of 2009, following the completion of an 
improved bilateral agreement.  The agreement grants both South 
African and Brazilian airlines 14 frequencies per week between the 
two countries in 2008, increasing to 21 in 2009, and 28 by 2010. 
South African Department of Transport Air Transport Director Vuwani 
Ndwamato said bilateral negotiations last month improved air 
capacity between the two countries and lifted other traffic rights 
restrictions.  "We have agreed on fifth freedom rights for airlines 
from both countries to four unnamed points, but this is restricted, 
in South Africa's case, to destinations outside South America, and, 
in Brazil's case, to destinations outside Africa," explained 
Ndwamato.  This means both Brazilian and South African airlines 
would be able to pick up and drop off passengers in South Africa or 
Brazil respectively and travel on to destinations outside of Africa 
or South America.  (Travel Hub, September 25, 2008) 
 
------------------------------------ 
Nationwide to Enter Full Liquidation 
------------------------------------ 
 
¶15. (U) Nationwide's liquidator Hannes Muller has confirmed that 
attempts to save the airline have been abandoned.  Nationwide had 
halted service without warning in April due to soaring oil prices 
and the collapse of a black economic empowerment (BEE) deal. 
Nationwide's troubles began when an engine fell off one of its 
Boeing-737 on take-off in November 2007.  It was cleared of fault by 
a Civil Aviation Authority (CAA) audit, but Nationwide was grounded 
at the start of the 2007 Christmas holiday season because the CAA 
was dissatisfied with its record-keeping on the origin of 
components.  Nationwide was provisionally liquidated at the end of 
April, and months of speculation followed about potential buyers and 
reports that it would resurface as a low-cost domestic carrier.  The 
airline will now go into full liquidation.  (Travel Hub, September 
25, 2008) 
 
BOST