SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER MAY 4, 2007

UNCLAS SECTION 01 OF 03 PRETORIA 001577 SIPDIS DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND TREASURY FOR OAISA/RALYEA/CUSHMAN 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 MAY 4, 2007 ISSUE ¶1. (U) Summary. This is Volume 7, issue 18 of U.S. Embassy Pretoria's South Africa Economic News weekly newsletter. Topics of this week's newsletter are: - Industrial Policy to Include Chemical Sector - Manufacturing Down Due to Strong Rand - Call Center Industry Booming - Trade Deficit Widens Slightly - Soweto Undergoing Gentrification - SA Audit Warns of Spiraling Power Crisis - New Regulator to Boost Port Efficiency End Summary. Industrial Policy to Include Chemical Sector -------------- ¶2. (U) As part of the Department of Trade and Industry's broader industrial policy framework, the chemical sector is one of the strategic sectors targeted for programs to drive growth and stimulate job creation. It is estimated that the proposed strategy will attract investment of up to 13 billion rand ($1.86 billion), which translates into an estimated 3.3 billion rand ($471.4 million) in foreign exchange earnings and creation of 5,000 skilled jobs by ¶2014. Currently, the industry provides 156 billion rand ($22.3 billion) in gross revenue, employs 177,000 people, accounts for 20% of SA's total manufacturing sales, and constitutes 4.5% of gross domestic product. The strategy is focused on growing downstream subsectors, a reverse trend from the capital-intensive upstream operations and producers that dominate the market. There will also be a review of the sector's pricing practices. Import parity pricing is the current common practice for pricing local basic chemical products. The key programs outlined in the framework are titanium beneficiation initiative, fluorochemical expansion, and petroleum, petro-chemicals and a plastics hub initiative worth $2 - $3 billion rand ($28.6 to $42.9 million) to be located at the Durban International Airport. (Business Day, April 30) Manufacturing Down Due to Strong Rand -------------- ¶3. (U) Manufacturing activity slowed for the first time in six months as gains in the rand lowered exports, according to the Investec purchasing managers index. A sharp fall in new sales orders is considered the main factor in the slowdown. Despite this slump, the sector remains buoyant and manufacturing is set to remain as one of the main drivers of SA's economy. Economists noted that while the rand is not as favorable as it was a few months ago, it is not uncompetitive and the robust economic outlook remains intact. (Business Day, May 3) Call Center Industry Booming -------------- ¶4. (U) The call center industry in SA continues to experience significant growth. Research by CallCentres.net indicates that approximately 65,000 people are employed in 535 call centers in SA. DTI's research reveals that SA's call center industry in SA is already comparable in size to most European countries, and with government incentives, foreign investment promotions, grants, and the recent reduction of Telkom's tariffs, the call center industry is expected to create more than 100,000 jobs, directly and indirectly, during the next five years. SA markets its industry as providing excellent quality service at a great financial savings. It is estimated that the cost of setting up a center in SA is 55% less than the cost of setting up a center in the U.S. Current challenges to the development of call centers are the lack of sufficient skills and the need for training programs. (Business Times, April 29) Trade Deficit Widens Slightly -------------- ¶5. (U) According to the South African Revenue Service (SARS),the trade deficit widened to 2.7 billion rand ($385.7 million) in March. Exports were up 13.6% month-on-month in March to 42.5 billion rand ($6.1 billion) and imports increased 12.9% for a record high of 45.3 billion rand ($6.5 billion). The cumulative trade deficit for the first three months of 2007 was 15 billion rand ($2.14 billion), compared with 14.7 billion rand ($2.10 billion) for the same period PRETORIA 00001577 002 OF 003 in 2006. The increase in imports from February to March was attributed to high imports of machinery, mechanical appliances, electrical equipment, mineral products and chemicals. This countered the decrease in motor vehicle imports. Exports were up due to increases in exports of semi-precious and precious stones and metals. Vehicle exports also rose. Economists indicated that the current account deficit is expected to narrow this year and predicted that, while SA will continue to run a large trade deficit, it may have reached its peak. (Business Day, May 2) Soweto Undergoing Gentrification -------------- ¶6. (U) Soweto is experiencing an economic awakening and undergoing a broad economic turnaround. The world-famous black township did not have significant infrastructural development or private investment for decades. In the past five years, however, the perception of Soweto has changed as studies reveal that the living standard of many blacks has moved up to "middle class". Sowetans are now increasingly finding new economic opportunities in their own backyard. ¶7. (U) Some of these job prospects are government-led large infrastructure projects, including construction of new roads and transport nodes, and the multimillion rand stadium for the 2010 soccer World Cup. Light industrial development at the Soweto Empowerment Zone, a focused area for new businesses, is also contributing to the increase in economic activity. A visible sign of the major upswing in Soweto is the dramatic growth in retail space, in which shopping malls are being planned and built throughout the township. SA's national retailers are rushing to fill the newly created space in these shopping meccas. They are pursuing 4 billion rand ($571 million) in spending power, which is a reflection of the gentrification of Soweto. In addition to retail space, other development projects include construction of lakeside residential units, office space, extreme sports venues, and other entertainment and recreational facilities. For example, in one neighborhood, a 100 million rand ($14.3 million) development is about to break ground. It will incorporate a shopping center, a 60-unit townhouse complex, and the new premises of the Soweto Hospice. A four-star hotel is also due to open in October. In addition to this retail- driven economic transformation, the collective economic strategy also includes empowerment of existing small business operators, local job creation, encouraging manufacturing, and development of small and medium enterprises. ¶8. (U) Soweto's housing market is another indicator of the increasing economic health of the township. Newly built house prices increased on average 50% last year. Although the sale of pre-owned property still lags, this figure is steadily rising. Soweto is not the only township to undergo economic improvements; it is just leading the way as other townships are beginning to build retail outlets and malls to cash in on the new spending power among the black middle class. (Financial Mail, April 27) SA Audit Warns of Spiraling Power Crisis -------------- ¶9. (U) Fears of power cuts this winter, and a major blackout on Johannesburg's East Rand since Monday, have heightened the public's attention on SA's power crisis. To date, electricity supply concerns have only centered on Eskom's failure to develop adequate generating capacity to supply the growing demand, but this week's release of The National Energy Regulator of SA's audit report also highlights SA's neglected distribution system. It is a further warning that more power blackouts can be expected. ¶10. (U) The report covers 11 large energy distributors and provides a dismal picture of SA's electricity distribution infrastructure. The audit, initiated after a spate of power outages in 2005, was aimed at determining the state of readiness of various municipalities in providing electricity. The audit assessed the conditions of substations and the network, the effectiveness of maintenance plans and execution, and the effectiveness of refurbishment and expansion plans. The result: "a dearth of skilled staff has resulted in the embrittlement of management resources and loss of control over essential technical elements" and inadequate investment and maintenance has led the systems of large municipal undertakings and metros to falter. Small municipalities were singled out as having some of the worst problems, with the report PRETORIA 00001577 003 OF 003 intimating that some were on the edge of collapsing. According to the report, the refurbishment backlog at the end of 2005 for utilities was estimated at 431 million rand ($61.6 million). With an average cost requirement to maintain present service levels at 420 million rand ($60 million),a total investment of 850 million rand ($121.6 million) is needed to begin improvements to the system. This would not, however, resolve the skills deficit, which is expected to worsen with the increase in the average age of senior staff. (Pretoria News and Business Day, May 3) New Regulator to Boost Port Efficiency -------------- ¶11. (U) With the appointment of nine non-executive directors, the independent National Ports Regulator (NPR) was officially set in motion on May 2. The NPR was six years in the making and is aimed at improving the efficiency of SA's commercial ports. The implementation of the NPR also marks the end of the National Ports Authority's (The Authority) role as regulator. The Authority can now focus on maintaining and improving port infrastructure. The NPR's tasks will include ensuring The Authority's activities are at acceptable levels of service for port users, preventing abuse of its monopoly power by The Authority, and maintaining impartiality and equity in port services. The NPR will have the ability to probe complaints against The Authority by port users and tenants, hear appeals, and impose fines or five-year prison sentences for reckless endangerment of the safety of navigation, persons or property in the port. (Business Day, May 3) BOST