SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER JUNE 15, 2007

UNCLAS SECTION 01 OF 03 PRETORIA 002155 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 JUNE 15, 2007 ISSUE ¶1. (U) Summary. This is Volume 7, issue 24 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - Zoellick Urges Africa "To Catch The Wave" - Planed Duty Cuts On Infrastructure Projects - Manuel Stresses Need For Exports - General Electric To Construct New Plant - Reserves Increase - Manufacturing Could Brake GDP - Hike Threatens SA's Cheap-Power Edge End Summary. -------------- Zoellick Urges Africa "To Catch The Wave" -------------- ¶2. (U) World Bank President-nominee Robert Zoellick told reporters that he is impressed by a new generation of African leaders who are taking responsibility for the economic development of their countries. Zoellick spoke to reporters in Pretoria at the end of a tour of Africa that took him to Ghana, Ethiopia, and South Africa. No one-size-fits-all approach could be adopted for Africa, Zoellick said, emphasizing the vast potential of the continent. "There are some strong opportunities here," he said. "You want to catch the wave and move forward with some of the high-quality economic leaders in Africa. I hope the World Bank can develop stronger partnerships with African countries to assist them in reaching stronger growth." Zoellick also cited the need for African countries to address infrastructure constraints and to make progress toward regional integration. (Business Day, June 11, 2007) -------------- Planed Duty Cuts On Infrastructure Projects -------------- ¶3. (U) The South African Government is considering the reduction of import duties on products needed for its four-year R400 billion ($75 billion) infrastructure development program. Last month the SAG's International Trade Administration Commission (ITAC) announced the review of two chapters of the tariff schedule, which include a wide array of electrical goods and mechanical appliances, including nuclear reactors and boilers. ITAC said that the review was a "proactive initiative" to support the infrastructure program and would determine whether current duties place an unnecessary burden on importers, especially in the case of items that are not manufactured domestically. Trade specialists have warned that unilateral cuts could undermine South Africa's bargaining power in international trade negotiations and strain the country's relationships with other members of the Southern African Customs Union, which rely on tariffs collected by South Africa. (Business Day June 11, 2007) -------------- Manuel Stresses Need For Exports -------------- ¶4. (U) Finance Minister Trevor Manuel played down the challenges faced by South Africa's rapidly expanding economy, saying export performance must improve for the country to sustain a faster pace of growth. Manuel told delegates to an International Monetary Conference meeting in Cape Town that South Africa's economy had clocked up annual growth of about 5% over each of the past three years, its fastest for a quarter of a century and the longest period of expansion in four decades. But the blistering pace has led to supply constraints, particularly in construction and energy. However, "For SA to sustainable grow faster, we must improve our export performance, especially in non-commodity sectors," Manuel said. Export volumes rose 6% last year mainly due to buoyant global demand and a weaker rand. Manuel also repeated the government's view that the widening deficit on the current account, seen as the most vulnerable spot in its economy, was not alarming due to strong capital inflows, which amounted to R144 billion ($20.6) last year. "Increased confidence in our economy means that we do not face a binding constraint on the balance of payments," he said. However, economists said the problem with this position is that the inflows, which mainly reflect equity investment, could subside for reasons beyond South Africa's control, like a sudden bout of global risk aversion or a sharp fall in commodity prices. That would knock the rand weaker and add to mounting inflation pressures, prompting PRETORIA 00002155 002 OF 003 interest rate hikes weighty enough to slow growth. (Business Day, June 6, 2007) -------------- General Electric To Construct New Plant -------------- ¶5. (U) GE Water & Process Technologies, a unit of the U.S. Company General Electric, is to design and construct a reverse osmosis seawater desalination plant, which will produce about 70,000 cubic meters of fresh water and 1,800 tons of 99.9% pure salt per day (630,000 tons annually). In a first for South Africa, the GE plant will recover ultra-pure salt from the concentrated brine stream for the production of chlorine, caustic soda, and hydrochloric acid at a new refinery to be developed by Uhde South Africa. The $220 million GE project is part of a larger investment totaling $800 million, which will see a new chlorine refinery in the Coega Industrial Development Zone, which lies about 25 kilometers west of Port Elizabeth. The refinery will be owned and operated by, Strait Chemicals, a unit of Singapore-based Chemical Industries Far East Limited, and will produce 610 tons of chlorine gas and 660 tons of caustic soda per day to meet the growing global demand for chlor-alkali and its derivatives. GE's seawater desalination plant will improve the overall economics of the chlorine refinery and ensure a reliable and locally available supply of high grade salt. Construction of the refinery is expected to take between 18 and 24 months and should be commissioned towards the end of 2009. Chlorine gas is used in making PVC, plastics, pesticides, footwear, disinfectants, water treatment and paint pigments, while caustic soda is used in parachutes, pen tips, telephones and pharmaceuticals. -------------- Reserves Increase -------------- ¶6. (U) According to South African Reserve Bank data, net gold and foreign exchange reserves increased from $24.59 billion at the end of April to $25.48 billion at the end of May. Gross reserves increased from $27.02 billion in April to $27.85billion in May. The SARB attributed the increase in the reserves to "a combination of valuation adjustments and foreign exchange operations conducted by the SARB for its own account". Economists expect the build-up of reserves to continue at a steady pace, although the recent weaker rand could have a somewhat negative impact on the rate of reserve accumulation. Nonetheless, economists expect the SARB to continue to build up reserves, with a $30 billion target in sight. International credit rating agencies have always been concerned by South Africa's relatively low foreign reserves if compared with other emerging markets. (Fin24, June 7, 2007) -------------- Manufacturing Could Brake GDP -------------- ¶7. (U) According to Statistics South Africa (StatsSA),manufacturing output growth in volume terms slowed from an upwardly revised 5.5% in March to 3.8% in April, suggesting the key sector could put a brake on economic growth this year. Analysts said the number did not bode well for the country's economic growth outlook for the year. Expansion in the sector slowed from 8.3% growth in the fourth quarter of 2006 to 4.7% in the first quarter of 2007. This has been blamed on slower global growth, which reduces demand for South African exports. The slower growth in manufacturing output was in line with a decline in the Purchasing Managers' Index (PMI),which points to trends in manufacturing ahead of official data, from 60.5 points in March to 57.9 points in April, indicating slowing underlying growth. Manufacturing is the second-biggest sector in Africa's biggest economy after financial services, accounting for nearly 17% of gross domestic product. (Fin 24, June 7, 2007) -------------- Hike Threatens SA's Cheap-Power Edge -------------- ¶8. (U) According to a study by New Jersey-based cost management consulting firm NUS Consulting Group, electricity prices in South Africa remain the lowest in the world despite the fact that power utility Eskom has a de facto monopoly in the market. However, the PRETORIA 00002155 003 OF 003 report warned that Eskom's planned 18% tariff increase could "dislodge" South Africa from its enviable position. Eskom has requested higher tariffs to help finance its R150 billion ($21.4 billion) capital investment program over the next five years. Eskom plans to build new power stations, increase the capacity of transmission lines, refurbish distribution infrastructure and bring back to service power stations that were shut down in the early 1980s. The NUS research found that Eskom had outperformed 13 other deregulated markets from both an infrastructural planning and pricing perspective, thanks to a vigilant and strong industry watchdog, the National Energy Regulator of SA (NERSA). "One of the interesting phenomena emerging from our surveys is that a well-regulated and well-managed electricity supply monopoly, treated as a matter of strategic economic importance, can outperform deregulated markets from both an infrastructural planning and pricing perspective," said Stephan Dolk, NUS General Manager in South Africa. He said South African electricity prices, at $0.04/kWh, were one-sixth of those in Denmark, the most expensive country in the world for electricity. NUS predicted that South African electricity prices would rise well above the inflation rate in the next 12 months, and could escalate sharply in the next few years should Eskom get the 18% tariff increase it has applied for from NERSA. (Business Day, June 6, 2007) BOST