SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER JULY 25, 2008

UNCLAS SECTION 01 OF 05 PRETORIA 001633 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 JULY 25, 2008 ISSUE PRETORIA 00001633 001.2 OF 005 ¶1. (U) Summary. This is Volume 8, issue 30 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - BER Predicts Slower Economic Growth and an Easing in Interest Rate Hikes - Treasury Sticks to 4% Growth Forecast - Manuel Does Not See Tax and Tariff Reductions as a Solution to Price Pressures - Wage Hike in the Textile Industry May be Positive for Inflation - Road Accidents Dent Economy - Labor Strikes over Power Crises Halts Auto Production throughout SA - Renault-Nissan Investment Welcomed by Struggling Auto Industry - Eskom Welcomes Front-loading of Government Loan - Eskom Worried about Rising Costs and Plant Outages - Vodacom Looks Beyond SA to Drive Growth - Chinese Company Seeks to Become Leader in African ICT Skills Development End Summary. -------------- BER Predicts Slower Economic Growth and an Easing in Interest Rate Hikes -------------- ¶2. (U) The University of Stellenbosch Bureau for Economic Research (BER) released its third quarter prospects report, which predicted a tough road for the South African economy. The report also indicated that new weighting changes to the CPIX (consumer price index minus mortgage costs) inflation measure would provide "some relief". Growth would slow further as the effect of interest rate hikes in April and June fed through to the economy. In light of the deteriorating growth outlook, BER Economist Hugo Pienaar forecasted an end to the current interest rate raising cycle and predicted the next interest rate reduction would be in June 2009. Nedbank's Chief Economist Dennis Dykes expressed similar views on the outlook for interest rates in 2009. Growth in gross domestic product (GDP) fell sharply from more than 5% in the fourth quarter of 2007 to 2.1% in the first quarter of 2008. Pienaar said the disappointing first quarter growth figure was "unlikely to be a once-off event". The BER is revising its 2008 annual GDP growth forecast down from 3.4% to 3.2%, while next year's growth forecast is downgraded from 3.8% to 3%. Pienaar attributed the downward revision to slower private consumption as well as a slowing in total fixed investment. He said there was a strong correlation between business confidence and growth. He cited a 19-point plunge in the business confidence index in the first quarter and a further 3-point fall in the second, as one of the reasons for downgrading growth prospects. The two-quarter fall from 67 to 45 points shows that more than half the respondents are dissatisfied with the business environment. The BER's latest forecast comes after a 5 percentage point upward adjustment in the Reserve Bank's official repo rate, since June 2006, which has pushed benchmark mortgage and interest rates to 15.5%. The interest rate rise came as inflation rose above the Reserve Bank's 3 to 6% target range. The CPIX, the central bank's benchmark index, has been above the range since April 2007 and was 10.9% in May 2008. The BER forecasts that CPIX will peak in September at more than 13% and will average 11.4% this year. QSeptember at more than 13% and will average 11.4% this year. However, BER has revised its 2009 inflation forecast down from 8.1% to "closer to 7%", following the release of Statistics SA's new weights for the CPIX consumer basket next year. Pienaar noted that the degree of monetary easing will depend on how sharply GDP growth slows next year and whether actual CPIX inflation - due to the new weights and/or potential sharp fall in the oil price - turns out to be lower than expected. The BER analysts said the second quarter GDP figures should show a temporary improvement as electricity supply recovered. The BER does not anticipate a recession, but notes that certain sectors like manufacturing and retail are likely to be in recession. The large external funding requirement of the current account deficit also remains an important risk factor for the Rand. "Combined with a projected recovery in the U.S. Dollar versus the Euro over the next 12 to 18 months, the Rand is forecasted to weaken against the greenback, but to strengthen somewhat against a softer Euro," noted the BER. It forecasted the rand to average R8.45 per dollar during the fourth quarter, which would imply a 13% depreciation from the current R7.50 level. PRETORIA 00001633 002.2 OF 005 (Business Day and Business Report, July 24-25, 2008) -------------- Treasury Sticks to 4% Growth Forecast -------------- ¶3. (U) Finance Minister Manuel told parliament that the National Treasury sees no reason to revise its 4% growth forecast presented at the time of the February 2008 Budget, despite the deterioration in the global and domestic economic environment. Manuel also rejected the notion that the South African economy may be heading for a recession, stating that "It is still too early to tell", but that the Treasury will keep a close eye on developments. In the first quarter of 2008, real GDP growth advanced at an annualized pace of 2.1%, and Manuel argued that even if the economy records no further growth for the rest of the year, annual growth in 2008 will still be 2.4%. Moreover, if growth remains at around 3% over the next three quarters, annual growth will be around 3.5% in 2008. The marked growth slowdown in the first quarter was mainly as a result of electricity supply disruptions. Though some mines and large industrial customers continue to operate with below optimal electricity supplies, the overall electricity supply situation seems to have stabilized for now, which is likely to contribute to a growth rebound in the second quarter of 2008. Most economists agree that talk of a recession may be premature, but nevertheless think that the Treasury's current 4% growth projection may be overly optimistic because business and consumer confidence had already sunk to very low levels. (ABSA-Newsletter, July 22, 2008) -------------- Manuel Does Not See Tax and Tariff Reductions as a Solution to Price Pressures -------------- ¶4. (U) Finance Minister Manuel rejected calls for lower food and fuel taxes in parliament, arguing that the Treasury's investigations found no compelling reasons for tax relief. He noted that 19 basic food items are already VAT zero-rated. These items have been selected to benefit the poor, but there is evidence that some producers and suppliers may be benefiting from the current regime. On the fuel levy, Manuel argued that the domestic fuel price is determined primarily by movements in the international oil price and the exchange rate. Fuel taxes play a small part since these taxes are specific taxes fixed for a year and they are low in comparison with other parts of the world. The primary sectors of the economy already benefit from the diesel tax rebate scheme. Moreover, a reduction in the fuel levy may require raising other taxes, such as company or individual taxes, to compensate for a revenue loss. There are also other issues such as changing energy consumption behavior, improving energy efficiency and broader environmental concerns that need to be considered. Although a reduction in food and fuel taxes may have brought a temporary reprieve, the inflation problem in South Africa is more broad-based than just food and fuel price inflation. In May 2008, around 86% of the CPIX basket was rising by 6% or more, compared with just 40% in March 2007. Considering these pressures, and that the Reserve Bank still needs QConsidering these pressures, and that the Reserve Bank still needs to factor recent electricity tariff hikes of around 30% into their forecasts, there is still a risk of a further 50-basis-points interest rate hike in August 2008. (ABSA- Newsletter, July 22, 2008) -------------- Wage Hike in the Textile Industry May be Positive for Inflation -------------- ¶5. (U) South Africa's clothing and textile workers Union (SACTWU) announced that it had reached an agreement for wage increases of between 8% and 11% in six of the nine sub-sectors of the textile industry. This increase will be backdated to July 1, 2008. In an environment where the latest CPIX inflation figure was 10.9% y/y in May, and a peak of above 12% expected in the third quarter of 2008, the latest wage settlement could be viewed in a positive light. Moreover, CPIX clothing increased by 9.7% y/y in May, suggesting very little additional inflationary pressure from the wage settlement. (Beeld, July 23, 2008) -------------- Road Accidents Dent Economy PRETORIA 00001633 003.2 OF 005 -------------- ¶6. (U) The Department of Transport reported that road accidents cost the economy an estimated R581 billion ($77 billion) between 1996 and ¶2006. The report includes the cost of injuries in its assessment of the economic toll of road accidents. "The estimated total costs of road accidents over the eleven year period give an idea of how much South Africa has lost out on potential production input or skills," the report said. More than 13,000 people are killed on South African roads each year, making the country one of the most dangerous in the world for drivers. Speeding, a lack of policing, and the high number of vehicles on the road that are not roadworthy are among the factors that have made South African roads unsafe. (Beeld, July 22, 2008) -------------- Labor Strikes over Power Crisis Halts Auto Production throughout SA -------------- ¶7. (U) Carmakers in South Africa halted production on July 23, after a trade union federation strike kept employees away from work. The Congress of South African Trade Unions (COSATU) called on its members in the Eastern Cape (South Africa's auto-manufacturing hub), Limpopo, North West and Gauteng provinces, to embark on a strike. This was in protest of rising power, fuel, and food prices, as well as over job losses stemming from the power crisis that hit the country in January. Ford, Daimler, General Motors and Volkswagen all closed their plants in the country for the day. Volkswagen South Africa employs 5,500 people, and all production-related staff were not at work; meaning 300 to 400 cars were lost, said spokesperson Bill Stephens. Daimler, which manufactures Mercedes Benz C-Class luxury vehicles and Mitsubishi Triton cars in East London, typically produces 220 units a day, spokesperson Annelise van der Laan said. The firm employs a total of 3,000 people in South Africa. Ford South Africa Spokesperson Rella Bernardes said that it would lose production of 340 vehicles, after shutting its Pretoria plant, as well as the 600 engines it would have assembled. COSATU has called for another work stoppage on August 6. (Engineering News, July 23, 2008) -------------- Renault-Nissan Investment Welcomed by Struggling Auto Industry -------------- ¶8. (U) Renault-Nissan announced it will invest about R1 billion in Nissan South Africa's assembly plant in Rosslyn, near Pretoria. The investment will be for the production of a new Nissan half-ton pickup and the Renault Sandero. The Sandero will be the first Renault vehicle to be manufactured locally. The investment would increase the plant's capacity from 40,000 units per year to 68,000 units per year in 2009. It would create 300 new jobs in the plant this year. Nissan currently has a workforce of about 1,900, after retrenching 410 workers last year, when a contract manufacturing agreement with Fiat Auto South Africa expired and production of the Nissan 1400 Bakkie ceased because of emission control legislation. The new jobs are being created at a time when the local motor industry is under severe pressure because of a sharp slump in sales, Qindustry is under severe pressure because of a sharp slump in sales, largely due to a series of interest rate hikes since June 2006 and the impact of inflationary pressures on consumers' disposable income. This has led to the closure of several dealerships and retrenchments in the retail motor industry. Manufacturers have been under pressure to align their production with new vehicle market demand. General Motors South Africa reported earlier this month that it was planning to retrench 520 workers. Nissan South Africa Managing Director Mike Whitfield said Nissan and Renault were reaffirming their commitment to South Africa with this manufacturing project. Apart from increasing the production capacity of the plant, the investment would be used to adapt the two vehicles to right-hand drive for the domestic market and to develop the local components and accessories supply chain. Local content in the vehicles will be 25% when production begins and will gradually increase. The cars would initially be sold in the local market but export opportunities for both vehicles were being investigated, said Whitfield. The new Nissan pickup would go on sale in October and sales were expected to exceed 17,000 units a year. Renault South Africa Managing Director Xavier Gobille said Renault would be expanding its local line with products ranging from entry-level to PRETORIA 00001633 004.2 OF 005 upper-range vehicles. This would include the launch of Renault's first crossover vehicle this year. (Business Report, July 22, 2008) -------------- -- Eskom Welcomes Front-loading of Government Loan -------------- -- ¶9. (U) State-owned electricity producer Eskom has welcomed the National Treasury's decision to bring forward the disbursement of the R60 billion ($8.5 billion) deeply subordinated loan from government. Finance Minister Trevor Manuel unveiled the details of the capital injection, funding of which will be accelerated over three years, instead of the originally-announced five years. Manuel indicated that the decision to front-load the share-holder loan was based on an analysis of the best way "to ameliorate the negative impact on Eskom's balance sheet, while smoothing the impact of tariff increases." "In addition to the deeply subordinated loan, government will consider providing guarantees to enable Eskom to access funding otherwise not available," National Treasury said in a statement. News of the injection came as Eskom officials set off on a European road show, where they will map out how they plan to close a R150 billion ($20 billion) funding gap through borrowings on the South African and international capital markets. (Engineering News, the Weekender, Mail & Guardian, Sunday Times, and Business Day, July 18-22, 2008) -------------- -------------- Eskom Worried about Rising Costs and Plant Outages -------------- -------------- ¶10. (U) Eskom's new chairperson Bobby Godsell announced that the spike in coal and diesel costs had put a massive dent in Eskom's bottom line for the fiscal year ending March 31, 2008. Primary energy costs, accounting for 46% of Eskom's running costs, rose by R5 billion ($667 million) to R18 billion ($2.4 billion),compared to the prior year. The appointment of the new chairperson is intended to help Eskom achieve a stabilization strategy it hopes will restore investor and public confidence. Outgoing Chairman Valli Moosa said, "I'm confident the entire winter will go without any load-shedding whatsoever." CEO Jacob Maroga said the power system had stabilized since May, but was "not out of the woods", adding that Eskom's reserve margin of 6% compared to the target of 15%. "Our number one priority is to keep the lights on," Maroga said. "Our second priority is to execute strategy and secure funding for capital expansion." Eskom continues to fret about coal availability and prices. Adding further to its woes, Eskom temporarily shut down three generating units (totaling 2,154 MW) this week: one of the units at its Koeberg nuclear station and coal-fired units at Majuba and Duvha. Eskom warned consumers of a higher risk of load-shedding and again called for a reduction in demand. Separately, Eskom promised to clarify the utility's approach to new connections with the imminent release of a comprehensive policy. (Engineering News, the Weekender, Mail & Guardian, Sunday Times, and Business Day, July 18-22, 2008) -------------- Vodacom Looks Beyond SA to Drive Growth QVodacom Looks Beyond SA to Drive Growth -------------- ¶11. (U) Vodacom reported steady customer growth across its five markets, but its South African operations showed only a moderate rise of 0.3% to 24.9 million. The new Vodacom CEO Pieter Uys said that although there were still growth opportunities in the next 18 months, aggressive expansion in other parts of the continent and acquisitions for its internet operation, Vodacom Business, were required. Uys is taking over from Alan Knott-Craig, who retires in September. Vodacom's domestic market share fell to 54% from 55% in March. Stanlib analyst Zwelakhe Mnguni said performance from South Africa was disappointing and was evidence that the local market was mature. "The key thing is that Vodacom's market share came off by 1%. That may not sound material but it does put them on the back foot in a near-saturation voice market. The South African market has reached a SIM-penetration rate of 96%, which is very high compared with other countries on the continent where the rate is in the 20% to 30% range," he said. Vodacom's overall customer base grew by 6.6% to 34.6 million, helped by businesses in Lesotho, Mozambique, the Democratic Republic of Congo (DRC) and Tanzania. Mnguni said Tanzania and the DRC seemed to be the next growth engines. "Overall PRETORIA 00001633 005.2 OF 005 it is clear that the group still has some growth momentum but all the thrust comes from outside South Africa," he said. (Business Report, July 23, 2008) -------------- Chinese Company Seeks to Become Leader in African ICT Skills Development -------------- ¶12. (U) Chinese telecommunications network solutions and equipment provider Huawei Technologies is seeking to position itself as a market leader in training Africans. The company, which reported total revenue of $16-billion in 2007, has been in operation for 20 years and has 100 international branches. Huawei manufactures and markets telecommunications services to South African telecoms companies Telkom, MTN, Vodacom, Cell C and Neotel. Huawei Chief Operating Officer Xue Bo said the company has built four training centers across Africa over the last couple of years, with the latest being built in Angola. "Over the last couple of years, more than 4,000 students have graduated from these training centers with skills in telecommunications products and management," he noted. The company has full-time professional instructors and engineers conducting the training. Huawei is also seeking to invest in programs focused on corporate social investment initiatives and, in the future, is looking to help university students get on-the-job training and to provide employment opportunities by establishing a scholarship program. "We are aiming to position the company as a leading telecommunications supplier and create job opportunities in South Africa. We want to encourage skills transfer, as there is room for development in the telecommunications industry, and the company wants to be a part of the solution," he added. Huawei employs more than 3,000 people in Southern Africa, with 70% local staff. "It is our aim to provide end-to-end solutions, network consultation and construction, among others," he said. Huawei opened its office in South Africa in 1988 and Vodafone awarded Huawei the Global Supplier Award for outstanding performance in ¶2007. (Engineering News, July 25, 2008) BOST