SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER SEPTEMBER 7,

UNCLAS SECTION 01 OF 03 PRETORIA 003166 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 SEPTEMBER 7, 2007 ISSUE PRETORIA 00003166 001.2 OF 003 ¶1. (U) Summary. This is Volume 7, issue 36 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - Business Confidence Down - Vehicle Sales Down - Economic Freedom Ranking Down - Telkom To Drop Call Center Prices - Angloplat Unveils BEE Deals - Egypt's OCI Invests In New Cement Plant - Downsizing Measures Underway At SAA - ArcelorMittal Gets $100 Million Fine End Summary. -------------- Business Confidence Down -------------- ¶2. (U) Rattled by global market volatility, the South African Chamber of Business (SACOB) Business Confidence Index fell from 99.6 points in July to 98.1 points in August, an 11-month low. SACOB said last month's turmoil, which prompted a sell-off in emerging market assets, could hold "major risks" for the South African economy, particularly if there were a lasting slowdown in capital inflows. SACOB was referring to fears that an anticipated slowdown in global growth may hit South African exports while further risk aversion could stem the portfolio investments that have so far financed the large deficit on the current account. South Africa's current account deficit is one of the largest among major emerging markets, reaching 6.5% of Gross Domestic Product (GDP) last year, its biggest ratio in more than 25 years. With exports rising slowly and imports soaring in response to an official investment spending drive, analysts expect the deficit to remain above 5% over the next few years, posing a threat to the rand if capital inflows subside. (Business Day, September, 2007) -------------- Vehicle Sales Down -------------- ¶3. (U) South African vehicle sales decreased by 3% from 59,805 units in August 2006 to 58,040 units in August 2007, the fifth consecutive decline in vehicle sales as higher interest rates dampened consumer demand. Figures released by the National Association of Automobile Manufacturers of South Africa (NAAMSA) indicated that passenger car sales decreased by 3.8% y/y in August and that this trend is expected to continue for the rest of the 2007. Sales of commercial vehicles also contracted for the first time this year, falling 1.4% y/y. McCarthy Motor Holdings Chairman Brand Pretorius attributed the decline in the commercial vehicle segment to the general slowdown in macroeconomic growth and said it was a cause of concern. Over the past four years, both the medium and heavy commercial vehicle segments have regularly showed double-digit growth of close to 20%. The growth rate of medium commercial vehicles slowed to 6.1% in August while heavy commercial vehicles sales growth dropped to 8% y/y. Economists said the economic impact of the South African Reserve Bank's monetary policy is becoming visible in declining vehicle sales, slower credit extension and lower retail sales. (Business Day, September 5, 2007) -------------- Economic Freedom Ranking Down -------------- ¶4. (U) According to the Free Market Foundation, South Africa has improved its economic freedom rating from 6.7 to 6.8 (out of 10). However, it has also moved down six places in the world rankings from 54th to 60th out of the 141 countries measured, to share this ranking with Lesotho, Thailand, Kyrgyzstan, Montenegro, Malaysia, and Trinidad and Tobago. The report explains that South Africa is sliding down the rankings because it is virtually standing still while being overtaken by countries that are steadily increasing their levels of economic freedom. It notes that South Africa could improve its economic freedom by addressing problematic areas that include: government expenditure and investment, tax rates, crime, international capital market controls, minimum wage and labor regulations, centralised collective bargaining, and bureaucracy costs. (Economic Freedom of the World: 2007 Annual Report) PRETORIA 00003166 002.2 OF 003 -------------- Telkom To Drop Call Center Prices -------------- ¶5. (U) The Department of Trade and Industry (DTI) met one of its first goals for its new industrial policy framework by securing Telkom's agreement to discount its telecommunications prices for business process outsourcing (BPO) operations. According to DTI Deputy Director-General Lionel October, Telkom was instructed to drop its prices to bring telecommunications costs in line with other competitive countries. High telecommunications costs have been a constraint to attracting foreign companies specializing in call centers. With the lower costs, one U.S. and two European firms have already decided to invest in call centers and expect to hire several thousand employees. South Africa has already had some success with call centers. The subsector has grown 8% per year over the last four years and currently employs 54,000 call center agents. (Business Day, September 3, 2007) -------------- Angloplat Unveils BEE Deals -------------- ¶6. (U) Anglo Platinum (Angloplat) unveiled three Black Economic Empowerment (BEE) deals to put almost $5 billion of its assets under the direct control of black South Africans and introduce new players to South Africa's dynamic platinum sector. The deals will boost Angloplat's BEE credentials, which has been prodded by the government to move faster to bring black players on board. New legislation introduced in 2004 requires South African mining companies to convert their old licenses to "new order" licenses and reach 15% black ownership by 2009 and 26% by 2014. It was not immediately clear if the new deal would resolve license conversions. The new transaction involves transfer of Angloplat's interests in the Lebowa Platinum Mine (on the northeast corner of the Bushveld complex) and the Boysendale Mine to Anooraq and Mvela Resources, as well as the introduction of a new employee share ownership plan. (Business Day, September 5, 2007) -------------- Egypt's OCI Invests In New Cement Plant -------------- 7 (U) Egypt-based Orascom Construction Industries (OCI) announced that it would invest $440 million in a new cement plant in South Africa's Northwest Province. The plant targets an annual capacity of two million tons in 2010. The investment comes as local producers have had to import cement to meet rising demand. (Business Day, August 30, 2007) -------------- Downsizing Measures Underway At SAA -------------- 8 (U) South African Airlines hopes to save R638 million ($89 million) by cutting jobs and renegotiating the contracts of its 10,000 employees. Trade unions project that at least 3,000 jobs could be affected by the downsizing. SAA plans to make a final decision after a series of consultations and predicts that 223 senior managers will lose their jobs saving the company R110 million ($15.3 million). SAA plans to offer severance packages to the affected employees out of the R4 billion ($550 million) it has requested from the government of which R1.4 billion ($200 million) was received in April. SAA hopes these cost-cutting measures will help the airline return to profitability within the next 18 months. SAA has been plagued by rising fuel, aircraft leasing, and salary costs. It also suffers from a bloated and complex management structure, and the restructuring is expected to streamline decision making and eliminate redundancies. SAA also plans to reduce perks such as travel benefits and fresh flowers at its check in counters. (Business Day, September 6, 2007) -------------- ArcelorMittal Gets $100 Million Fine -------------- 9 (U) South Africa's Competition Tribunal imposed a huge $100 million fine on ArcelorMittal South Africa (formerly Mittal Steel SA, formerly Iscor Steel) for abusing its dominance and charging PRETORIA 00003166 003.2 OF 003 excessive prices for flat steel. The penalty is the largest imposed by the Tribunal in its nine-year history and represents 5.5% of Mittal's $1.8 billion flat steel sales in the 2003 financial year. The Tribunal is entitled to impose a penalty of up to 10% of a firm's annual turnover for contravening the Competition Act. The Tribunal also ordered Mittal to stop imposing conditions on the resale of flat steel products bought from it. The fine and the prohibition order follow the tribunal's March ruling that Mittal had contravened the Competition Act. That ruling responds to complaints lodged by Harmony Gold (and others) in 2004 alleging that Mittal has abused its market position. Tribunal Chairman David Lewis said in the strongly worded statement that the excessive prices charged by Mittal had caused "considerable damage to customers of the affected products and to the structure and fabric of the economy". Lewis warned Mittal that if it attempted to side-step the prohibition and use alternative mechanisms to maintain excessive prices, "then the prospect of more invasive remedies will loom large and may even include the enforced divestiture of its steel producing plant". The ruling opens the way for Harmony to institute civil action against Mittal, which was ordered to pay the costs of the complainants. Mittal expressed disappointment at the ruling and said that it would consider the judgment with its advisers. (Business Report, September 7, 2007) TEITELBAUM