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UNCLAS SECTION 01 OF 03 PRETORIA 000038 
 
DEPT FOR AF/S/; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR TRINA RAND 
USTR FOR JACKSON 
 
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 JANUARY 9, 
2009 ISSUE 
 
PRETORIA 00000038  001.2 OF 003 
 
 
¶1. (U) Summary.  This is Volume 9, issue 2 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
 
- Optimistic Outlook with Rates, Inflation Easing 
- Rand at Mercy of Global Forces 
- Permission to Raise Prices a Relief to 
  Pharmaceutical Manufacturers 
- Bread Cartel Reaches Settlement with Competition 
  Commission 
- New Low-Cost Carrier May Spark Price War - 
  If it Can Get Off the Ground 
- Altech Withdraws Objection to 
  MTN-Verizon South Africa Merger 
- Eskom Boosts Maintenance During Lull in Demand 
- Eskom Scraps Nuclear Tenders - Cash-strapped 
  Parastatal Looks at Cheaper Energy Deals 
- Wind Energy Seminar in Pretoria 
 
End Summary. 
 
 
------------------------------ 
Optimistic Outlook with Rates, 
Inflation Easing 
------------------------------ 
 
¶2. (U) Falling interest rates, inflation and gas prices would bring 
relief to the embattled South African economy this year, but 
conditions for business and consumers are set to remain challenging. 
 South Africa's slowing growth has forced companies to scale back 
investment plans and shed jobs.  "The business environment will 
remain tough in 2009, especially in the first half of the year," 
commented Business Unity SA economic consultant Raymond Parsons. 
South Africa's banking sector has been shielded from the global 
credit crunch by capital controls and sound regulation, but prices 
for key mineral exports have plunged on waning global demand and 
consumer spending contracted for the first time in a decade.  A 
local recession looks unlikely, but economic growth slowed from an 
average of 5% in each year from 2003 through 2007 to about 3% in 
¶2008.  It is expected to moderate further to nearly 2% this year. 
Consumers may benefit from interest rate cuts and lower gas prices 
in 2009.  The South African Reserve Bank kicked off an easing cycle 
with a half-percentage point reduction last month.  Economists 
expect interest rates to fall by another three percentage points by 
the time the easing cycle ends next year.  That will put more money 
in the pockets of consumers, who drive two-thirds of the economy. 
Slowing private and public sector investment is also a concern for 
South Africa.  Parsons expects the next few weeks to be "very 
telling" in terms of which way the economy is headed, although 
uncertainty would persist until the second half of the year when 
policy changes are clear, lower interest rates take effect, and the 
global backdrop had settled.  (Business Day, January 5, 2009) 
 
------------------------------ 
Rand at Mercy of Global Forces 
------------------------------ 
 
¶3. (U) Experts are divided over whether the rand will reap the 
rewards of an expected revival in global risk appetite in 2009. 
Some analysts say that a recovery of commodity prices and a pick up 
in domestic growth in the second half of the year may propel the 
rand from the current rate of R9.3/$1 to R8/$1.  However, other 
analysts think the rand will be hit by meager capital inflows and 
the risk that general elections in April could prompt changes in 
economic policies that have earned South Africa credibility in 
global markets.  Most analysts agree that the rand's performance 
Qglobal markets.  Most analysts agree that the rand's performance 
will ultimately be driven by forces beyond South Africa's control as 
investors wait to see if huge rescue packages avert a prolonged 
recession in the world's largest developed economies, which are also 
South Africa's principal export markets.  Standard Bank currency 
strategist Michael Keenan predicted, "It's going to be a jagged 
recovery as there is still a lot of risk aversion out there, but we 
do see a trend of rand firmness, especially in the latter half of 
this year."  (Business Day, January 6, 2009) 
 
----------------------------------- 
Permission to Raise Prices a Relief 
 
PRETORIA 00000038  002.2 OF 003 
 
 
to Pharmaceutical Manufacturers 
----------------------------------- 
 
¶4. (U) Pharmaceutical manufacturers have welcomed the Health 
Department's decision to let them raise medicine prices as much as 
13.2%.  The price increases will give drug makers some relief from 
the margin pressure they experienced last year as the cost of 
importing raw materials soared with the rand weakening.  As a result 
of currency depreciation, several local manufacturers -- including 
Africa's biggest generic drug maker, Aspen Pharmacore -- considered 
discontinuing unprofitable lines, including several antibiotics. 
Innovative Medicines SA, an industry body for multinational 
pharmaceutical firms, said the increases will provide relief to drug 
makers.  "The whole market has been under huge pressure," said CEO 
Val Beaumont.  (Business Day, January 8, 2009) 
 
------------------------------- 
Bread Cartel Reaches Settlement 
with Competition Commission 
------------------------------- 
 
¶5. (U) Food producer, marketer, and distributor Foodcorp agreed to 
pay a R45 million fine ($4.7 million) to the Competition Commission 
after a price-fixing admission.  Foodcorp admitted that its 
subsidiary Sunbake Bakeries was engaged in fixing the price of bread 
sold to consumers.  The fine represents 6.7% of Foodcorp's turnover 
from all its baking operations for the 2006 financial year. 
Foodcorp also agreed to cooperate with the Commission in the 
prosecution of any other cartel members and to develop and implement 
a compliance program to ensure that the company did not engage in 
anti-competitive behavior.  The Commission investigated Foodcorp 
after bread distributors in the Western Cape complained that three 
other food producers were fixing bread prices.  (Mail and Guardian, 
January 6, 2009) 
 
------------------------------------------ 
New Low-Cost Carrier May Spark Price War - 
If it Can Get Off the Ground 
------------------------------------------ 
 
¶6. (U) New low-cost airline Airtime is expected to spark a price war 
with rival airlines if it takes off later this month as planned. 
According to Airtime's website, fares for flights between Durban and 
Johannesburg from January 25 to March 22 are being sold for as 
little as R225 ($23) for a one-way ticket, excluding airport 
charges.  Rival airlines are charging double that amount. 
Representatives from low-cost competitors said they would not adjust 
their prices in response to the launch of Airtime, but the sharp 
drop in fuel prices would allow them to cut fares.  Whether Airtime 
will be ready to take to the skies on January 25 is still in doubt 
because its negotiations to lease three Boeing 737-200s and to use 
the lessor's air operator certificate (AOC) have collapsed.  That 
appears to leave Airtime without aircraft or an AOC barely three 
weeks before it is due to begin flights between Johannesburg and 
Durban.  (Business Day, January 6, 2008) 
 
------------------------------- 
Altech Withdraws Objection to 
MTN-Verizon South Africa Merger 
------------------------------- 
 
¶7. (U) Technology group Allied Technologies (Altech) has withdrawn 
its objection to the merger between telecommunications giant MTN and 
Verizon South Africa.  Altech opposed the merger between the two 
QVerizon South Africa.  Altech opposed the merger between the two 
telecommunications companies because of "substantial competition 
concerns" related to the removal of an effective upstream 
infrastructure rival.  The Competition Commission cleared the 
transaction and recommended that the transaction be approved without 
conditions.  MTN plans to acquire Verizon European Holdings' 69.38% 
stake in Verizon South Africa, which performs layer switching, 
retail business internet connectivity, network security and 
information technology infrastructure services.  (Engineering News, 
January 7, 2009) 
 
------------------------ 
Eskom Boosts Maintenance 
During Lull in Demand 
------------------------ 
 
 
PRETORIA 00000038  003.2 OF 003 
 
 
¶8. (U) Eskom expects electricity demand during late January to fall 
about 13% as compared with demand one year ago, allowing it to boost 
maintenance on its power network.  Eskom is "doing as much 
maintenance as possible" during the decrease in demand, remarked 
Eskom spokesperson Fani Zulu.  South Africa used an average of 
31,500 megawatts (MW) in January 2008.  Eskom expects South Africa 
to use an average of 27,500 MW in January 2009.  Much of the decline 
in demand is attributable to reduced worldwide demand for 
ferrochrome, ferromanganese, and steel production and the closure or 
reduced production of the related smelters in South Africa.  Eskom 
views the current decline in demand as "short- term" and is going 
ahead with a five-year R353 billion ($37.5 billion) expansion to 
double power capacity by about 2025.  Zulu noted, "Demand for 2009 
is very unpredictable as the depth of the downturn is still being 
assessed and the speed of recovery is uncertain.  A clearer picture 
will only emerge in February as industry assesses their order 
books."  (Bloomberg, January 6, 2009) 
 
------------------------------ 
Eskom Scraps Nuclear Tenders - 
Cash-strapped Parastatal 
Looks at Cheaper Energy Deals 
------------------------------ 
 
¶9. (U) Cash-strapped state power utility Eskom halted the tender 
process for "Nuclear One" - the project to build a second 
pressurized water reactor (PWR) - because it could not afford the 
prices on offer from the two bidders, Westinghouse and Areva, as one 
of its final acts of 2008.  Eskom and the government are still 
committed to buying a new PWR, but they are gambling that they will 
get a much better deal this year if the global financial melt-down 
leads to a rash of cancelled orders for nuclear reactors around the 
world.  Public Enterprises Director General Portia Molefe said, "It 
is a different world from when this tender went out.  It is 
definitely going to be much more of a buyer's market."  Molefe 
declined to give figures, but said the prices submitted by 
Westinghouse and Areva were way above what equivalent coal-fired 
stations would cost.  Westinghouse chief representative in South 
Africa Rita Bowser said the U.S.-based company was still keen to 
demonstrate that it could provide one of its AP1000 reactors at a 
competitive, affordable cost, based on a localization model.  Bowser 
said it was important for South Africa to provide certainty about 
its nuclear plans and to work with the supplier to deliver a 
successful model.  Independent energy consultant Andrew Kenny said, 
"Eskom might bring in other people such as the Russians and the 
Koreans, perhaps having a downward effect on pricing."  He said that 
Eskom and the South African government were looking at a partnership 
model to build and run the PWR.  "It might be that the negotiations 
become not just vendor to customer, but government to government," 
he said, noting that that might favor French government-owned Areva. 
 (Business Times, January 5, 2009) 
 
------------------------------- 
Wind Energy Seminar in Pretoria 
------------------------------- 
 
¶10. (U) The South African Cities Network and the Embassy of Denmark 
plan to host a one-day wind energy seminar in Pretoria on January 
Qplan to host a one-day wind energy seminar in Pretoria on January 
¶23.  Energy experts from Danish energy companies are expected to 
deliver papers and talks on wind mapping, wind technology, 
connecting wind power to the national grid, green technologies and 
wind energy in South Africa.  Renewable energies comprise 27% of 
Denmark's electricity supply, and Danish companies are world leaders 
in wind power production.  The South African Department of Minerals 
and Energy has set a target of generating 10,000 gigawatt hours of 
electricity from renewable resources by 2013.  Eskom indicated its 
intentions to diversify its energy mix away from its heavy reliance 
on coal-based power generation.  Eskom is in negotiations with 
potential suppliers for its proposed Western Cape wind farm.  It was 
expected that the farm would consist of 50 2 MW turbines, generating 
some 100 MW of power.  The planned completion date for the wind farm 
is March 30, 2010.  (Engineering News, January 5, 2009)