SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER APRIL 30, 2008

UNCLAS SECTION 01 OF 05 PRETORIA 001225 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 APRIL 30, 2008 ISSUE PRETORIA 00001225 001.2 OF 005 ¶1. (U) Summary. This is Volume 8, issue 23 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - Higher Costs and Electricity Pressure Manufacturing - SARB Revises Inflation Forecasts Higher - Real Estate Prices Drop - Delta Begins Direct Flight to Cape Town - Cape Town to Get Airport Link - SA to Develop Battery-Powered Car - SA Company's Ship Comes In - Regulator Settles into Deliberation Mode after Intensive Hearing Process - Eskom Pores Over Cogeneration Bids - Still Looking for IPP's - Carbon Levy will Zap Power Users - Telkom Buyout News Mount - Vodafone Eyes Telkom's Vodacom Shares - Digital Broadcasting "On Track" - Tourism Industry Faces Skills Exodus as Hospitality Demand Mounts for 2010 End Summary. -------------- -------------- Higher Costs and Electricity Pressure Manufacturing -------------- -------------- ¶2. (U) The Investec purchasing managers' index (PMI) dropped from 54.1 basis-points in April to 49.1 basis-points in May on a seasonally adjusted basis. The index, a measure of underlying manufacturing activity, is below the key 50 basis-points level that signals expansion. Investec said the manufacturing sector had felt the impact of significant increases in input costs, weak new sales orders and higher production costs. Manufacturing employment growth also remained sluggish. Investec Asset Management Analyst Andre Roux said electricity constraints and a general moderation in demand are likely to maintain downward pressure on employment. SA has grappled with shaky electricity supplies since the start of 2008 as state-owned utility Eskom struggles to generate enough power to meet demand. However, analysts believe the weak first quarter manufacturing results, largely caused by the electricity woes, may be followed by a firmer second quarter as the manufacturing sector makes up for lost production. Investec said a more competitive rand exchange rate may also support the manufacturing sector in the future. However, capacity constraints in the form of the power issue and skills shortages, as well as weakening global and local demand, may hamper a recovery in the near term. (Business Day, June 2, 2008) -------------- SARB Revises Inflation Forecasts Higher -------------- ¶3. (U) South African Reserve Bank (SARB) Chief Economist Dr. Monde Mnyande expected CPIX inflation to fall back to the inflation target-range of 3-6% only in 2010. The new projection is worse than SARB's outlook at the April Monetary Policy Committee (MPC) meeting, when it said inflation would likely return to below the 6% inflation target by the fourth quarter of 2009. According to SARB, the inflation outlook has deteriorated "substantially since the beginning of 2008", and the main upside risks to inflation emanate from food and fuel price pressures, as well as the prospects of a significant electricity tariff increase. The SARB also expected the current account deficit to remain above 7% of the gross domestic product during the first half of 2008, which adds to the currency Qproduct during the first half of 2008, which adds to the currency risk associated with the rand. Economists believe that the deterioration in the SARB's projected inflation trajectory, considerable upside inflationary pressures, the gaping current account deficit and the currency risk it poses make another interest rate hike incontestable. Most analysts expect another 100 basis-point hike at the June MPC meeting. (ABSA Newsletter, June 3, 2008) -------------- Real Estate Prices Drop -------------- ¶4. (U) Residential property prices are falling in real and nominal terms as a "perfect storm" of higher inflation, interest rate hikes, and the National Credit Act (NCA) come together to put increasing pressure on the market, according to the latest Standard Bank Property Gauge. The downward trend in prices was "reflective of a severe drop in demand for residential property," said Standard Bank Economist Sizwe Nxedlana. The median house price for last month dropped 13.2% y/y. He noted, however, that this figure was PRETORIA 00001225 002.2 OF 005 distorted by a high base effect because in the months leading up to the implementation of the NCA there was a surge in median house prices, as market participants attempted to rush through higher-end deals. But even with these distortions stripped out, the decline was 5.5%. "The residential market is suffering and we think it's going to get worse," Nxedlana said. Another factor in the decline in real estate process is the increase in the numbers of people trying to sell their homes, many of whom have plans to emigrate to other countries. (Business Day, June 3.) -------------- Delta Begins Direct Flight to Cape Town -------------- ¶5. (U) Delta launched direct international flights between John F. Kennedy (JFK) International Airport in New York City and Cape Town International Airport on June 3. The new service is part of Delta's global expansion plans, which include the inauguration of nine international flights in the next 10 days. The new flights will leave Cape Town four days a week on Mondays, Wednesdays, Fridays, and Saturdays. Delta will also strengthen its presence in Africa with the launch of new direct service from JFK to Cairo International Airport on June 4. (Delta Press Release, June 2, 2008) -------------- Cape Town to Get Airport Link -------------- ¶6. (U) State-owned SA Rail Commuter Corporation (SARCC) said Cape Town could soon get a rail link between its airport and central business district. SARCC recently completed a feasibility study on the project, and was looking to partner with the private sector, CEO Lucky Montana said. The Cape Town rail link would likely come on-line after 2011, once the first phase of the high-speed Gautrain in Gauteng (which would link SA's busiest airport, OR Tambo International with central Johannesburg) is completed. SARCC also operates SA's passenger rail company, Metrorail. Montana said Metrorail was suffering from years of underinvestment, which had driven journeys and passenger levels down. Illustrating this was the fact that it had lost 100 million passenger trips over a ten-year period, he noted. Metrorail requires significant levels of investment, which Montana estimated at R25 billion ($3.2 billion) over the next three years. He said that 80% of Metrorail's passengers were working class males, who earned less than R2,500 ($325) a month, and that they would not be able to carry the investment burden. Montana said SAG, which already subsidized an average of 67% of each Metrorail passenger ticket, needed to step in. (Engineering News, June 4, 2008) -------------- SA to Develop Battery-Powered Car -------------- ¶7. (U) SA is in the process of developing battery-powered passenger and utility vehicles. The first prototype is expected to be launched by the end of 2008. Department of Science and Technology (DST) Deputy Minister Derrick Hanekom announced the project during his budget vote speech in parliament. According to Hanekom, building the environmentally-friendly car was appropriate and timely to mitigate the growing pollution from fossil fuels and SA's Qto mitigate the growing pollution from fossil fuels and SA's economic vulnerability to volatile oil prices. He said the project was a concerted effort between various stakeholders, including universities and the auto industry. DST Group Executive Officer Dr. Boni Mehlomakulu added that the six-passenger car will have a speed-determined range of between 100km and 400km and would be fitted with roof solar panels to enable the battery to charge when parked in the sun or plugged into the mains. The project is funded from DST's Innovation Fund. An additional R300 million ($38.9 million) is required to build a manufacturing plant to produce the vehicles. Mehlomakulu stated that the manufacturing project would commence by 2010, with the first 4,000 units targeted for the SAG fleet. Additional production would be determined by demand and interest shown by investors. (Business Day: The Weekender, May 31-June 1, 2008) -------------- SA Company's Ship Comes In -------------- ¶8. (U) Cape Town-based Resource Ballast Technologies (RBT) announced that it had secured an exclusive license agreement with Norway-based Wilhelmsen Maritime Services (WMS) to offer sales, installation, service and marketing of a locally-developed ballast water treatment system. The system minimizes the transfer of harmful aquatic PRETORIA 00001225 003.2 OF 005 organisms and pathogens in ships' ballast water. As ships travel from port to port, weight distribution on the vessel is adjusted to compensate for loads and conditions. This is done by means of taking in or releasing ballast water. In the process, aquatic species are transported around the world in these ballast tanks. When these species are released into new environments, they may become invasive species, seriously disrupting native ecosystems and out-competing local species. The introduction of the zebra mussel, native to the Black Sea, has been estimated to have caused $1 billion damage to the eastern U.S. in the past decade. RBT CEO Bernard Jacobs said environmental concerns about the spread of harmful aquatic organisms across the oceans have made the treatment of ballast water a critical issue. Since the adoption of the International Maritime Organization's international convention for the control and management of ships' ballast water and sediments in 2004, substantial efforts have been dedicated to the development of effective onboard treatment systems. WMS evaluated the few systems available and choose the RBT system because it satisfied all its criteria for minimal footprint, low power consumption, easy operation and installation, treatment results and simple technology. The system will undergo sea trials on board the WMS merchant ship Toronto. Proprietary components of the RBT system will be manufactured by RBT locally and assembled by WMS. (Business Day, June 2, 2008) -------------- - Regulator Settles into Deliberation Mode after Intensive Hearing Process -------------- - ¶9. (U) The National Energy Regulator of South Africa (NERSA) now has to reach a decision on whether to grant an increase to state power supplier Eskom by June 18, after having received more than 370 submissions and having posed over 150 questions to more than 40 presenters in its recently concluded electricity tariff public hearings. The three-day hearings generated by far the most public interest in the regulator's history, according to regulator member for electricity Thembani Bukula. He said the most common theme was a call for a "smoothed" pricing methodology over five-years. This leaves NERSA with a conundrum because Eskom only applied for a hike (60 percent) for 2008/09 and submitted figures and forecasts for only this year, relating to primary energy and demand-side management costs. Another theme at the hearings was the overwhelming perception that there are "policy gaps, or policy vacuums that need to be filled", particularly around pricing. Bukula noted that proposed policy changes discussed in cabinet four weeks ago aligned with the route already taken by NERSA - aiming for a price determination over a given period that would help to smooth increases and avoid any price shocks. Bukula rejected the notion that presenters at the hearings had strayed too far off the subject of the hearings. He said NERSA would call a press conference to announce its price increase decision on June 18. (Engineering News, May 29, 2008) -------------- -------------- Q -------------- -------------- Eskom Pores Over Cogeneration Bids - Still Looking for IPP's -------------- -------------- ¶10. (U) State power utility Eskom is assessing more than 15 cogeneration bids submitted ahead of its May 31 deadline for the so-called Pilot National Cogeneration Program (PCNP),aiming for 3,000 MW of co-generated power by 2012. The utility - somewhat controversially - has been given the mandate to be the country's only buyer for power arising from industrial facilities and new independent power producers (IPPs). Besides the PCNP, Eskom has launched two separate programs to seek IPPs: the Medium Term Purchase Program and the Multi-Site Base-Load IPP Program to fill a supply gap of 2,100 MW. Department of Minerals and Energy (DME) Chief Director Omphi Aphane said Eskom would be doing the procurement for new base-load capacity, as opposed to the peaking IPPs where DME was the procurer. The DME process to secure new private peaking capacity was set back when preferred bidder AES announced that the project was not viable under the terms originally tendered. Aphane asserted, "You cannot have a situation where people bid on a competitive basis, and then you are selected the preferred bidder, then we change the rules to suit you - we cannot do that." He said DME is currently in negotiations with the five consortiums, which - along with AES - were pre-qualified to build peaking power stations. "I suppose it is a matter of time, but we are looking at concluding that one deal that was not concluded," said Aphane. (The runner-up to AES was Suez of France, which is rumoured to be in discussions.) Frost & Sullivan Analyst Jeannot PRETORIA 00001225 004.2 OF 005 Boussougouth argued that the integration of the IPP program into the SA power system was a positive development, but identified the following difficulties for raising funds for sub-Sahara Africa IPPs: * undeveloped financial markets, * dilapidated energy infrastructure, * volatility of fuel prices, * perceived risk of doing business in Africa, * and slow reform of the power sector. Absa Capital Specialist Anand Naidoo added foreign exchange risk, hoping that Eskom and Treasury will be able to do dollar-based power purchase agreements in the future to mitigate this substantial risk. He said the market is still getting used to the idea that the rate of return for IPPs will be higher than Eskom's current rate of return. (Engineering News, May 30-June 3, 2008) -------------- Carbon Levy will Zap Power Users -------------- ¶11. (U) NERSA will take into account the carbon tax announced in this year's national budget when deciding on the electricity price hike. The Chamber of Mines and the Steel and Engineering Industries Federation of SA called for the tax to be either postponed or that it be a part of the hike NERSA approves. Treasury appears committed to the tax, which is aimed at cutting SA's greenhouse gas emissions. Treasury Deputy Director-General Ismail Momoniat said the 2 Rand cents per kilowatt-hour levy on non-renewable sources of electricity would be implemented on schedule from September and was expected to raise $0.6 billion per year. Although the tax is to be levied on the generator of electricity Eskom - or in some cases, the municipality - it is likely to be passed on to consumers. Chamber of Mines Advisor Dick Kruger said "To levy a carbon tax in a situation where we are totally dependent on fossil fuels penalizes customers who have no choice." He asserted that the carbon tax would translate into an increase of at least 10% for some members. Momoniat said that SA - as the world's fourteenth-largest emitter of carbon dioxide per person - needed to reduce emissions and a carbon tax would decrease demand. He noted that the tax would level the playing field by being imposed also on long-term contracts. (Business Report, June 2, 2008) -------------- Telkom Buyout News Mount -------------- ¶12. (U) Shares in Telkom jumped after it emerged that it was the target of a takeover bid. Telkom has confirmed that it was approached last week with a formal offer for a 100% buyout by a consortium headed by Mvelaphanda Holdings, an investment firm led by the prominent financier Tokyo Sexwale. Although Telkom did not state the size of the offer, Mvelaphanda was apparently prepared to stump up R90 billion ($12 billion) for total ownership of the company. ICT Analyst Rajay Ambeker said the takeover talk followed a long-running pattern and it was far from clear whether it would culminate in a change of ownership. SAG owns 38% of Telkom, state pension administrator Public Investment Corporation (PIC) owns 15%, and black investment group the Elephant Consortium owns another 6%. (Business Report, June 3, 2008) -------------- Q -------------- Vodafone Eyes Telkom's Vodacom Shares -------------- ¶13. (U) British-operator Vodafone wants to acquire a further 12.5% stake in the SA's leading cellular network Vodacom, which is part owned by Telkom, for R19 billion ($2.5 billion). Telkom said discussions with Vodafone began on May 14 and were separate from the interest expressed by the Mvelaphanda Holdings consortium. Vodafone said its bid was conditional on Telkom unbundling or spinning-off its remaining 37.5% stake in Vodacom to its existing shareholders. A Vodacom source said Vodafone wanted to obtain a controlling stake in Vodacom without having to dilute its equity stake by selling off a part of the group to black investors under the black economic empowerment (BEE) program. Under a charter agreed by the industry, SA ICT companies are bound to sell a 30% stake to black investors as part of the BEE policy. This is the second time in less than a year that Telkom and Vodafone - the world's largest mobile phone company by revenue - have been in talks about a Vodacom stake sale. PRETORIA 00001225 005.2 OF 005 (Business Report, June 3, 2008) -------------- Digital Broadcasting "On Track" -------------- ¶14. (U) Minister of Communications Ivy Matsepe-Casaburri announced that SA was on track for the digital broadcasting migration process in her 2008 budget speech on June 3. The dates for the switch on of the digital signal and switch off of the analog signal will be November 2008 and November 2011, respectively. She also noted that infrastructure provision for 2010 FIFA World Cup will involve the upgrade of Telkom's core network to meet FIFA's requirements and Telkom will implement the access network from its exchanges into the stadiums. Post 2010, the excess capacity of both the core and the access network will cater to the increased domestic demand. (Business Day, June 4, 2008) -------------- Tourism Industry Faces Skills Exodus as Hospitality Demand Mounts for 2010 -------------- ¶15. (U) Southern Sun Managing Director Helder Pereira warned that the SA hospitality industry faced a major problem with the shortage of trained staff and an exodus of professionals that could hamper efforts to maintain international standards in the sector. Pereira, who announced his departure from the group in August after 12 years, said the staff shortage might not be solved before the 2010 FIFA World Cup. Pereira said the industry faced a shortage of more than 24,000 chefs and cooks and more than 8,000 managers. "Retaining skills is my biggest concern. Without the necessary skills, growth in the sector is impeded, and we soon will not be able to maintain international service standards." It was not only the skills shortage in its own sector that poses a problem for the group. The exodus of skills in the building sector was also hampering hotel development plans. "A combination of limited skills development and exodus of skilled professionals has had a direct effect on the industry. Although the expectation for delivery and quality remain high, the reality is that it is not being met easily," Pereira said. Availability of new sites and delays due to power cuts also posed challenges. "Serviced land with available power is attracting a premium value while load shedding during construction is having time and related cost implications." The group said it cost R2-3 million ($260,000-$390,000) per room to build a five-star hotel. Despite challenges facing the hotel group, Southern Sun expects trading levels to remain at healthy levels despite a slowdown in other sectors. Pereira said rates continued to drive yields with the average room rates up 15.7% last year to an average R721 ($94) per night. Johannesburg showed the biggest gain, up 21% y/y in 2007 to R688 ($89) a room per night, while rates in Cape Town rose 10% to R792 ($103). Cape Town is still the most expensive destination in SA despite slower rates growth. Occupancy levels also remained at healthy levels with the average in the three main centers - Johannesburg, Cape Town and Durban - at 74% last year. "There has been an 8.2% increase in international visitors traveling to SA. Qbeen an 8.2% increase in international visitors traveling to SA. This has resulted in the demand for quality hotel rooms from business and leisure markets," said Pereira. The 2009 African Nations Cup and the 2010 FIFA World Cup will also play a big role in demand. Pereira did not expect the global slowdown to affect the industry much. (Business Day, May 28, 2008) BOST