SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER MAY 9, 2008

UNCLAS SECTION 01 OF 05 PRETORIA 001003 DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND TREASURY FOR TRINA RAND 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 9, 2008 ISSUE PRETORIA 00001003 001.2 OF 005 ¶1. (U) Summary. This is Volume 8, issue 19 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - Manufacturing Activity Rebounds - Credit Data Points to a Further Rate Hike - Business Confidence Dips Again - Ford SA Secures Africa Export Contract - Vehicle Sales Still Sagging - Potential Buyers for Nationwide - Eskom Issues New Tender for 2,100 MW of Independent Base-Load Capacity - Eskom Suspends New DSM Projects - Mining for Safety - SA to Benchmark ICT Costs - Asian Companies Eye SA Mobile Market - Durban Trade Port Project Launched to Boost Provincial Economy - Emirates to Start Direct Service to Durban - Cape Town Focuses on Climate Change End Summary. -------------- Manufacturing Activity Rebounds -------------- ¶2. (U) Manufacturing activity rebounded unexpectedly last month after plunging to a five-year low in March, easing fears of a recession in the economy's second-biggest sector. The purchasing managers index (PMI) rebounded from 43.7 in March to 54.1 in April. The rebound follows three consecutive months where the index was below the neutral level of 50, signaling a contraction in the manufacturing sector during the first quarter. However, the latest PMI reading suggests some manufacturing resilience to the generalized slowdown in economic activity. (Business Day, May 7, 2008.) -------------- Credit Data Points to a Further Rate Hike -------------- ¶3. (U) Statistics South Africa (StatsSA) reported that credit extensions to the private sector (PSCE) increased from 20.8% y/y in February to 22.6% y/y in March, well above Bloomberg's consensus expectations of a 20.5% increase. The higher PSCE growth is a further disappointment following poor inflation numbers in April and together with a slowdown in the real economy, it is unlikely that the inflation-targeting Monetary Policy Committee (MPC) would leave rates on hold at its June 12 meeting. Most economists now agree that a further 50 basis-points interest rate hike at the June meeting looks highly likely. (Fin24, May 5, 2008) �A; -------------- Business Confidence Dips Again -------------- ¶4. (U) The South African Chamber of Commerce and Industry (SACCI) Business Confidence Index (BCI) declined slightly from 93.9 index points in March to 93.4 index points in April 2008. "Although this is the lowest level thus far in 2008, the pace of decline in the BCI appears to have slowed," noted SACCI. The BCI has dropped by 8.5 index points, or 8.3%, since April 2007 and the average for the SACCI BCI in the first four months of 2008 is 93.8 index points compared with the average of 100.9 index points in the first four months of 2007. "Strong relative price adjustments on a global scale on basic items such as food and crude oil further complicate decision-making by business and exert increasing pressures," concluded SACCI. (I-Net Bridge, May 7, 2008) -------------- Ford SA Secures Africa Export Contract -------------- Q -------------- ¶5. (U) Ford Motor Company of Southern Africa (FMCSA) has secured an export contract to supply the Ford Ranger pickup to African markets outside South Africa. FMCSA, which already produces the Ford Ranger at its Pretoria plant, began exporting right-hand-drive Rangers to sub-Saharan markets in April. This will be followed by left-hand-drive units in July. FMCSA expects to produce around 10,000 Rangers for export during the remainder of 2008. This will increase to 24,000 Rangers for export in 2009, and approximately 40,000 by 2010, raising FMCSA's total export volume to 60,000 units per year. Producing at this level should enable FMCSA to qualify for the benefits due to flow from a revised Motor Industry Support Program (MIDP). This SAG program is currently the subject of a review, with the final details to be announced in August 2008. The PRETORIA 00001003 002.2 OF 005 Department of Trade and Industry (DTI) has indicated that it is set to introduce significant change to its automotive policy from 2012, with the emphasis to shift from export incentives to volume-production support. In a document published in December 2007, the DTI noted that SAG "intends to support production platforms/investment plans that intend to reach a minimum volume of output per platform of 50,000 units per year within a reasonable period of time". FMCSA President and CEO Hal Feder said the move "further highlights Ford's ongoing commitment to expanding its operations and export component in South Africa." (Engineering News, May 6, 2008) -------------- Vehicle Sales Still Sagging -------------- ¶6. (U) The National Association of Automobile Manufactures of South Africa (NAAMSA) reported that new vehicle sales fell by 2.8% y/y, or 1,204 units, to 43,536 units in April 2008, an improvement on the previous month's fall of 17.6%. However, analysts said the trend was still a sign of a sagging market. "Domestic new car and light commercial vehicle sales had reflected further weakness during April, 2008, while aggregate industry sales had received support from above-average sales of medium and heavy commercial vehicles," NAAMSA said. Demand in the new car market had weakened substantially in recent months as a result of the cumulative effect of interest rate increases, pressure on disposable income due to rising energy and food costs, and negative consumer sentiment and business confidence. Supported by strong investment sentiment and infrastructural spending, sales of vehicles in the medium and heavy truck segments of the industry maintained their upward momentum with increased sales of 17.9% y/y in the case of medium commercials, and 34.8% y/y in the case of heavy trucks and buses in April 2008. NAAMSA said the new domestic car and light commercial vehicle sectors were expected to remain under pressure as a result of tight monetary conditions, rising inflationary pressures, high levels of household debt and a further modest slowdown in economic activity, while the medium and heavy truck segments should continue to perform relatively well, registering positive growth during 2008. (I-Net Bridge, May 7, 2008) -------------- Potential Buyers for Nationwide -------------- ¶7. (U) Nationwide's Provisional Liquidator Hannes Muller met with two potential buyers on May 6, but received no firm offers. More than 30 buyers had shown an interest since the airline stopped flying in April. Muller said the two potential buyers were local companies with foreign interests and neither was an existing airline. If Muller can not find a buyer within a week there will be little of Nationwide to sell, with staff leaving in droves. Both Comair and 1Time confirmed yesterday that they were likely to employ some Nationwide staff. Muller said that potential buyers would have to reach some agreement with creditors, as the airline's liabilities would make it virtually impossible to revive. According to Nationwide's documents, total liabilities are R218 million ($29 QNationwide's documents, total liabilities are R218 million ($29 million),including R71 million ($9.3 million) in outstanding tickets. Any potential buyer would have to acquire new aircraft as Nationwide's fleet of 10 fuel-heavy Boeing 737-200s and three Boeing 727-200s are no longer viable. "With fuel prices at record highs, it will be difficult for any investor to make a return using the existing fleet," Muller says. Nationwide's leased Boeing 767-300, used on the London route, has been returned to its owner in Ireland. (Business Day, May 7, 2008) -------------- Eskom Issues New Tender for 2,100 MW of Independent Base-Load Capacity -------------- ¶8. (U) State power company Eskom released its long-awaited expression of interest for new base-load independent power producers (IPPs) to fill an anticipated gap of some 2,100 MW ahead of the possible deployment of large-scale nuclear capacity. In an advertisement in Business Day, Eskom invited interested parties to bid to supply "new, multiple-site, base-load IPPs" with a minimum capacity of 400 MW and indicated that requests for proposals to pre-qualified bidders could be issued in July. Eskom anticipates a supply gap of 4,000 MW while waiting for new coal-fired plants to come on line between 2012 and 2017 (new nuclear capacity is expected to come on stream in later years). It is widely expected that half PRETORIA 00001003 003.2 OF 005 of the supply shortfall could be filled by the much-anticipated Mmamabula power project, which is being advanced by Toronto-listed CICF Energy in Botswana. Eskom's tender states that the offer is in line with South Africa's stated policy of having 30 percent of its new generation capacity provided by IPPs and Eskom would extend a 40-year purchase agreement to winning bidders as single buyer. The base-load tender is over and above the earlier tender for co-generation and IPP options up to 3,000 MW for the medium term, as well as the pilot national cogeneration program tender, which closes on May 31. According to Engineering News, Eskom has not received a single firm cogeneration offer, despite earlier suggestions that potential for as much as 5,000 MW existed. (Engineering News, April 30, 2008) -------------- Eskom Suspends New DSM Projects -------------- ¶9. (U) Eskom Demand-side-management (DSM) Manager Monkwe Mpye said Eskom has suspended new DSM projects because of "cash flow issues" stemming from soaring coal and diesel prices, but it is confident that it would begin signing new projects starting in June. Eskom's DSM programs include offering incentives to replace older, less efficient equipment with high-efficiency units, including light bulbs, solar water heaters, pumps, motors, and compressors. Under its DSM program, Eskom was hoping to trim 3,000 MW of South Africa's consumption by 2012 and 8,000 MW by 2025. Eskom is depending on future funding from its application for a tariff increase under review by the national regulator and an $8.5 billion shareholder injection from the SA government. Eskom expects to receive a term sheet from Treasury over the next few weeks regarding the loan, as well as an outline of various scenarios for the actual transfer of funds. Eskom will also need significant funds for its ambitious capital expansion program. (Engineering News, May 5, 2008) -------------- Mining for Safety -------------- ¶10. (U) The deaths of nine workers at Gold Fields' South Deep mine on May 1 Workers Day brought the issue of mine safety to the fore yet again. Last year ended with mineworkers' trade unions going on a national strike over safety. The strike came after some high-profile accidents that saw the number of fatalities reach 220 for the year, up from 201 in the previous year. Anglo's Cynthia Carroll and Minister of Minerals and Energy Buyelwa Sonjica have made a big issue of mine safety. Official statistics indicated that some progress had been made this year: in the 12 months to February, the fatality rate fell to 0.19 per million hours worked, from 0.20 in the previous 12 months - and to 0.41 per 1000 persons at work, from 0.44. The May 1 accident - which brought Gold Fields' deaths to 14 during one week - has generated particularly strong protests, because it was due to a snapped lift cable, rather than a rock fall or random event. A Business Day editorial called for caution to wait for the results of the investigation, as well as the results of the safety audit ordered by President Mbeki, before making too many angry accusations. Effective mine safety requires strong Qangry accusations. Effective mine safety requires strong partnerships between the mining companies, trade unions, and the government. That is especially so as South African gold mining is going ever deeper and becoming ever more risky because of the age and nature of the ore bodies. South Deep itself is a new mine that is still in development and has a rather fraught history. (Business Day, May 8, 2008) -------------- SA to Benchmark ICT Costs -------------- ¶11. (U) Minister of Public Enterprises Alec Erwin announced that a comparative study into the respective costs, availability, access and usage of telecommunications infrastructure and services between South Africa and five other emerging markets is under way and would be completed by June 2008. The countries selected for the benchmarking exercise included South Korea, Malaysia, India, Brazil and Chile, and the process to collate the data was "in motion", said Erwin in a prepared statement. The study came amidst rising anxiety about the cost of telecoms in South Africa, and against an aspiration by SAG to materially enlarge the size of the business process-outsourcing sector. President Thabo Mbeki had raised the issue on several occasions and South Africa's competition authorities were also keen to probe allegations of excessive pricing by state-owned Telkom, which previously had a fixed-line monopoly. PRETORIA 00001003 004.2 OF 005 However, Telkom had mounted a court action challenging the SA Competition Commission's jurisdiction over the industry, given that it had its own economic regulator in the form of the Independent Communications Authority of South Africa. (Engineering News, May 8, 2008) -------------- Asian Companies Eye SA Mobile Market -------------- ¶12. (U) Speculation that mobile-operator MTN was in talks with Bharti Airtel of India was confirmed in the press. MTN issued a cautionary statement emphasizing that "talks were exploratory in nature and may or may not lead to any transaction". Bharti Airtel's Chairman Sunil Bharti Mittal told the press that he had "been approached by bankers in the last few months in a much more frenzied manner", but had not formally discussed any bid for MTN with his own board." The Financial Times reported that Bharti Airtel would "move pretty quickly" if MTN's board put it up for sale. Bloomberg quoted analysts as saying MTN had been on most firms' shopping list for the past two years, and whoever bought the company was expected to pay a huge premium per share. MTN had aggressively built its assets in the past six years by acquiring and winning licenses in poorly-penetrated countries on the African continent. MTN's acquisition of Investcom two years ago gave it access to 10 additional countries including Afghanistan, Yemen and Ghana. MTN now has more than 21 operations in Africa and the Middle East. Its other operations are in countries including Nigeria, Iran, Swaziland, Syria, Sudan and Botswana. If Bharti's bid went through, analysts said it would expose MTN to a culture of low-cost operations, as Bharti had expertise in running networks at minimal costs. China Mobile Ltd, the world's biggest mobile carrier, said it is also interested in the South Africa market but has not bid for MTN. "China Mobile has not joined the MTN bidding, but we are interested in the South African market and we are looking at various opportunities for entering that market," CEO Wang Jianzhou told reporters. China Mobile dominates its domestic market with roughly 400 million subscribers, more than three times the combined customer base of Bharti and MTN, but has a mixed track record of acquisitions. An analyst with Daiwa Institute of Research said that if China Mobile were to bid for MTN, it would likely do so at the parent company level - an approach often taken by Chinese State-controlled companies when making acquisitions. (Business Report, May 5, 2008 and Engineering News, May 8, 2008) -------------- Durban Trade Port Project Launched to Boost Provincial Economy -------------- ¶13. (U) The SAG launched the Dube Trade Port project as a catalyst for economic growth and the creation of sustainable employment opportunities in Kwazulu-Natal (KZN) Province. The project, located about 40 kilometers north of downtown Durban, will include a trade zone and the new King Shaka international passenger and cargo airport facility. More than R1.6 billion ($211 million) has been spent on the design of the R6.8 billion ($907 million) Dube Trade Qspent on the design of the R6.8 billion ($907 million) Dube Trade Port project. The King Shaka International Airport is expected to handle new-generation, long-haul freight and commercial aircraft. Consulate General Durban staff recently visited the airport and observed that major construction is underway at the passenger and cargo terminals, the control tower, access roads, and runways. Project management admitted that the project is two months behind schedule, but predicted complete construction by March 2010 in advance of the FIFA 2010 World Cup. KZN Provincial Minister of Finance and Economic Development Zweli Mkhize said an "aggressive" marketing strategy was under way to attract additional airline services to the new King Shaka International Airport. Mkhize said 2010 had provided the platform for growth and development. He added that government investment in the Dube Trade Port project and the local soccer stadium also signaled an improvement in investor confidence in the KZN province. The project has received significant interest from a United Arab Emirates-based entity. (Independent News & MEDIA IOL Online, April 23, 2008) -------------- Emirates to Start Direct Service to Durban -------------- ¶14. (U) Emirates Airlines announced that it will increase its PRETORIA 00001003 005.2 OF 005 presence in South Africa with the introduction of daily flights to Durban starting December 2008. The direct link is expected to provide a boost for tourism and the KZN provincial economy. The new service - Emirates' third direct connection between Dubai and South Africa - comes close on the heels of the launch of its third-daily service to Johannesburg in 2007 and daily service to Cape Town in ¶2008. An Emirates press-release noted that Durban's location on the east coast of South Africa made it a natural hub for trade with the Indian Ocean and Asia Pacific countries, boosting its status as Africa's largest port and the world's ninth busiest. Durban will play a catalytic role in strengthening trade movement between the United Arab Emirates and South Africa. Emirates Airlines President Tim Clark said, "Africa is key to Emirates' global network expansion strategy. We currently operate 86 flights per week to 15 African gateways and, owing to the continent's growing economy and escalating demand for air travel, these flights operate at robust seat factors of over 80%." Emirates will serve Durban with an Airbus A330-200 aircraft. The wide-bodied aircraft also offers about 14 tons of belly-hold cargo capacity that will facilitate efficient and timely imports of chemicals, petroleum products, and foodstuff from Germany, United Kingdom, China and the United States. Dube Tradeport Chief Executive Rohan Persad added that Emirates vote of confidence in Durban could also lead European and Indian airlines to begin direct service to Durban. (The Mercury, May 6, 2008, Emirates Press Release, May 5, 2008) -------------- Cape Town Focuses on Climate Change -------------- ¶15. (U) The Western Cape provincial government installed 60 Eskom-accredited solar water geysers in households to combat climate change and promote sustainable energy use. The project could save up to 500 MW in electricity, which would ease pressure on the national electricity supply. The project represents the first phase of a bigger proposed project through which the Western Cape provincial government would install 1,000 solar-powered geysers in local communities. Provincial Premier Ebrahim Rasool said the project was being implemented among Western Cape's poor communities, because climate change is a poverty issue, which would affect the poor the most. According to Rasool, the project is also a means of bringing renewable energy to the poor. (Engineering News, May 2-8, 2008) BALL