SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER AUGUST 1, 2008

UNCLAS SECTION 01 OF 05 PRETORIA 001712 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 AUGUST 1, 2008 ISSUE PRETORIA 00001712 001.2 OF 005 ¶1. (U) Summary. This is Volume 8, issue 31 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - Rand Strengthens as Trade Deficit Decreases - Inflation Races to 11.6% - China to Extend Acquisitions in Africa - Bad Bank Loans on Rise in South Africa - Trade Talks Collapse Bad for South Africa - MIDP Rewrite 'Poses Risk to Car Exporters' - OECD Report Questions MIDP Policy - Gautrain Might not be Ready for World Cup - End of Load Shedding for Johannesburg - City Power - Wishful Thinking? - The Next, Bigger Crisis - Power Distribution - South Africa Stopped Zimbabwe Power Exports Months Ago - Government Proposes New Carbon Taxes - Climate Change Could Destroy Species in Kruger National Park - CITES Criticized for Authorization for Ivory Sales to China End Summary. -------------- Rand Strengthens as Trade Deficit Decreases -------------- ¶2. (U) The rand rose to a six-month high against the dollar after South Africa's trade deficit narrowed unexpectedly last month. The local currency climbed as much as 0.8% to R7.33 to the dollar, the strongest level since February 4. The South African Revenue Service (SARS) said the deficit fell from R1.7 billion ($233 million) in May to R183 million ($25 million). "The more favorable trade balance, despite remaining in deficit territory, is a welcome reprieve after reflecting an average monthly deficit of R6.5 billion ($890 million) in the year to date," Standard Bank Economist Shireen Darmalingam said. SARS figures reflect a trade deficit of R34.2 billion ($4.7 billion) for the year to date. Exports rose 6.1% in June, mainly as a result of robust growth in exports of jewelry, especially gold. Exports of mineral and chemical products also rose strongly, contributing R2.7 billion ($370 million) to export revenue. Growth in exports of vehicles remained robust, rising 45.8% y/y. The rise in these categories was partly countered by a decline in exports of base metals, which fell by R4 billion ($548 million). Imports stayed resilient in June, increasing from R57.9 billion ($7.9 billion) in May to R60.3 billion ($8.3 billion) - an increase of 4.2% after declining 12.5% in the previous month. Imports of mineral products such as oil were again the main reason for the increase in imports, with most other categories relatively unchanged over the month. (Business Day, August 1, 2008) -------------- Inflation Races to 11.6% -------------- ¶3. (U) Statistics South Africa (StatsSA) announced that CPIX inflation (consumer inflation excluding mortgage costs) surged from 10.9% in May to 11.6% in June, exceeding consensus market forecasts for an 11.3% increase. CPIX inflation has now breached its 3%-6% official target range for 15 months in a row. Prices for food and fuel were once again the main culprits. Food prices increased by a shocking 18.2% y/y, while transport costs increased 17.4% y/y in June. The Reserve Bank has raised the policy interest rate by five percentage points to 12% since June 2006 in a bid to curb mounting Qpercentage points to 12% since June 2006 in a bid to curb mounting price pressures, primarily sparked by rising food and fuel costs. The annual rise in CPIX is expected to climb above 13% later this year, as the effect of steep hikes in electricity tariffs feeds into consumer prices. That will in turn put upward pressure on inflation expectations and pay settlements, which some economists believe could prompt the South African Reserve Bank to raise interest rates on August 14. (Business Day, July 31, 2008) -------------- China to Extend Acquisitions in Africa -------------- ¶4. (U) High-level bankers from the Industrial and Commercial Bank of China (ICBC) and from Standard Bank, respectively China and Africa's PRETORIA 00001712 002.2 OF 005 biggest banks, are examining potential targets in Africa's oil and gas, ICT, base metals and power sectors, according to executives at Standard Bank. They said that the resulting deals would be worth at least $5.5 billion, the size of the 20% stake in Standard purchased last year by ICBC. Standard intends to use the connection with ICBC to open doors to Chinese investors and guide them into Africa. Standard has a presence in 18 sub-Saharan Africa countries. The banking executives said that Nigeria, Democratic Republic of Congo, and Angola are ripe for Chinese deals. (Financial Times, July 30.) -------------- Bad Bank Loans on Rise in South Africa -------------- ¶5. (U) The South African Reserve Bank's (SARB) 2007 Supervision Annual Report noted that South Africa's banking system is sound and profitability is strong, but conceded that bad debts are rising as borrowing costs increase. Non-performing loans in the commercial banking sector increased from R18.8 billion ($2.6 billion) at the end of 2006 to R29.4 billion ($4 billion) at the end of 2007, and continued to grow into 2008. By the end of May, bad loans, including a tighter change in definition after the implementation of Basel 2 standards, had grown to R55.7 billion ($7.6 billion),which accounted for 2.5% of total loans and advances. The ratio has averaged about 1% in the past. However, SARB's Registrar of Banks Errol Kruger said there was no cause for alarm, with the capital adequacy ratio still high at more than 12% and banks closely monitoring the situation. "It would not be correct to say it is not a worry but it is not a surprise ... there are no red lights flashing," he said, adding. "I am very happy to report that the banks are in good shape." Local banks have no direct exposure to the global credit crisis, but domestic conditions have deteriorated due to tighter monetary policy and rising prices. The SARB report showed that banks' profitability remained solid due to strong asset growth. Total net income after taxes rose 20.6% y/y to R31.8 billion ($4.4 billion) at the end of December 2007, while the cost-to-income ratio stood at 50.6% in May 2008. Total industry assets increased to R2.86 trillion ($392 billion) by the end of May. (Beeld, July 30, 2008) -------------- Trade Talks Collapse Bad for South Africa -------------- ¶6. (U) Business Unity South Africa (BUSA) said it was disappointed by the news that the latest round of negotiations at the World Trade Organization (WTO) had failed to reach agreement. It was clear that some progress was made on key matters related to agricultural and industrial negotiations. "South African business regrets that it was not possible to cement these movements and address other outstanding issues, including some of those of specific concern for South Africa," BUSA said. The status quo now remained for the foreseeable future. "This means that South African exports will continue to face competition from subsidized products from other countries," noted BUSA CEO Jerry Vilakazi. With the collapse of the WTO talks, the QBUSA CEO Jerry Vilakazi. With the collapse of the WTO talks, the possibility of redressing the imbalance in the global trading system in favor of developing countries was also put on ice. BUSA said it remained committed to working with the government and other stakeholders in continuing to actively participate in WTO negotiations. (Beeld, August 31, 2008) -------------- MIDP Rewrite 'Poses Risk to Car Exporters' -------------- ¶7. (U) South Africa's vehicle sector is deeply concerned about the revised architecture of the Motor Industry Development Program (MIDP),with insiders warning that major exporters and capital-intensive producers in particular stand to lose. South Africa was forced to review the program as it does not comply with World Trade Organization (WTO) rules. Material changes, notably a shift from an export-based incentive to a production allowance, may not be attractive enough to keep export-oriented manufacturers based in South Africa. BMW and DaimlerChrysler would be hit hard, as they export 80% and 60%, respectively, of their total production. After a consultative session with the team reviewing the MIDP, it is understood that virtually all segments of industry are unhappy with PRETORIA 00001712 003.2 OF 005 the new structure and its implications for profitability. The sector is already under pressure with a decline in demand for cars. One insider said the latest draft was "WTO compatible, but does not support industry". The new scheme is expected to be released at the end of August 2008. (Business Day, July 28, 2008) -------------- OECD Report Questions MIDP Policy -------------- ¶8. (U) The 30-member Organization for Economic Co-operation and Development (OECD) criticized South Africa's Motor Industry Development Program (MIDP) in its first report on the country. The OECD said, "Such a support program is often justified by the 'infant industry' argument. The extent to which such an argument may apply to a sector essentially driven by foreign direct investment is, however, questionable, as is the quasi-permanent character of the subsidies." The OECD report contended that there is a risk of waste and misallocation of resources, as these policies often further distort competition between industries or firms. OECD Secretary General Angel Gurra suggested that a more detailed cost-benefit study be undertaken to establish the validity of the MIDP. However, Department of Trade and Industry (DTI) Director-General Tshediso Matona recently defended the economics behind sustained automotive-industry support. Matona said the new program would shift the emphasis away from the current export focus, to one that emphasized 'scale' in the production of vehicles, and was supportive of the development of world-class component manufacturing. "Through the MIDP, we know now that we have the capacity to produce high-quality cars for export. We now need to develop the economies of scale so as to reduce production costs and to deepen the components industry. Those are the two main pillars of the new support instrument," Matona said. (Engineering News, July 25, 2008) -------------- Gautrain Might not be Ready for World Cup -------------- ¶9. (U) Bombela Concession Company CEO Jerome Govender announced that the Gauteng Provincial Government has not yet committed to accelerate construction of the rapid-rail Gautrain project. The Gautrain is a public-private partnership between the provincial government and Bombela, a consortium consisting of international partners. Govender emphasized that the first-phase of construction was contracted for 45-months and would not be completed until the end of June 2010. This means the system will not be operational in time for the 2010 FIFA World Cup, which starts on June 9. "We need a change in the contract - an instruction from government to accelerate the project - to achieve [a] May target," said Govender. "We were never contracted to finish the project in time for the World Cup." The provincial government will have to increase the budget to acquire the additional resources necessary to speed up construction, should it want the airport link to be completed in time. The second phase of the project -which links Johannesburg and Pretoria- is set to be completed by April 2011. Gautrain Project Leader Jack van der Merwe said the project team will only know by QLeader Jack van der Merwe said the project team will only know by mid-2009 whether it will possible to meet the May 2010 target. (Engineering News, July 25, 2008) -------------- End of Load Shedding for Johannesburg - City Power - Wishful Thinking? -------------- ¶10. (U) The City of Johannesburg municipal power supplier City Power assured consumers that load shedding was a thing of the past, asserting that City Power had enough electricity even if state power supplier Eskom requested a cut in supply. City Power Managing Director Silas Zimu asserted that the municipality's mitigation program had been successful in producing more than 500 MW of additional power. "Even if Eskom asked us to load shed, we won't as the City of Johannesburg," said City Councilor Roslynn Greef. City Power has trumpeted a number of positive planning measures, including the installation of smart meters, establishing pricing incentives, seeking to refurbish inactive gas turbines, and creating a "virtual power station" based on massive installation of solar water heaters. However, implementation is still a challenge. PRETORIA 00001712 004.2 OF 005 Johannesburg consumes about 3,500 MW of power, compared to 3,200 MW in Paris. (Engineering News, Star, Business Day, July 29, 2008) -------------- The Next, Bigger Crisis - Power Distribution -------------- ¶11. (U) The failure to overhaul the power distribution sector could cause the next crisis in the electricity industry. The government has tacitly admitted that it has failed to overhaul South Africa's vast electricity distribution industry since a plan to consolidate the sector was first put on the agenda 13 years ago. "One of the lessons I have learnt in this process is that this restructuring is extremely complex - it cuts across all spheres of government and we need constant consultations and persuasion. It if was really simple, we would have done it long ago," says Nellie Magubane, the DME's deputy director in charge of electricity. "It is not just about legislation - it is about money, and the issues are also political." Electricity is currently distributed by Eskom and 187 municipalities - the fragmented system has been fraught with financial inefficiency, management problems, and lack of investment in maintenance and capacity, especially at the local government level. The government's restructuring plan would entail that Eskom and the 187 municipalities distributing power be split into six Regional Electricity Distributors (REDS),which would be easier to regulate and manage. It would also provide a better way to raise commercial financing. The REDS fall under the state-owned Electricity Distribution Industry Holdings (EDI). However, the plan has proved unworkable, because it relies on municipalities and Eskom to voluntarily cede to the REDS their power distribution function, assets, revenues, and staff - without addressing the issues that affect the REDS. Unless there is a constitutional amendment to give national government power over electricity distribution, municipalities will cling to their right to distribute power because it is their largest single source of income. With municipal finances in a mess, the lack of investment in electricity distribution could worsen and cause the next power crisis. (Financial Mail, July 25, 2008) -------------- South Africa Stopped Zimbabwe Power Exports Months Ago -------------- ¶12. (U) South Africa stopped supplying electricity to Zimbabwe several months ago, according to Eskom CEO Jacob Maroga. He said there was no political motive. "It is simply a contractual issue. They had been paying for their electricity in advance for the last two to three years. They simply stopped making new orders." He said there was no outstanding debt. Eskom said it believed Zimbabwe was continuing to pay for electricity imports from other regional countries, which could include Mozambique, Zambia, and the DRC. It could also include Botswana, but Botswana's government has been particularly critical of Mugabe since the election. (Engineering News, July 30, 2008) -------------- Government Proposes New Carbon Taxes -------------- Q -------------- ¶13. (U) Department of Environmental Affairs and Tourism (DEAT) Minister Marthinus Van Schalkwyk announced a cabinet-endorsed proposal to introduce incentives and taxes aimed at reducing carbon emissions. The Minister said that although the tax structure has not yet been defined, the cabinet has instructed the National Treasury to investigate the issue and propose new incentives and taxes. Van Schalkwyk warned that the policy reform could change South Africa's economic structure over the coming years by encouraging drastic emission reductions in the transportation sector and forcing a shift towards public transport. The new policy could also intensify the development of hybrid and electric cars. As a coal-based economy, South Africa is listed among the world's largest carbon dioxide emitters. The government is seeking to nudge businesses to adopt green programs and cleaner production cultures. Critics of the proposed taxes argued that the move would be counter-productive. Chemical and Allied Industries Association CEO Laurain Lotter said that the taxes would add significantly to the cost of doing business in South Africa and urged that the government explore other options. (Business Day, July 29, 2008) PRETORIA 00001712 005.2 OF 005 -------------- - Climate Change Could Destroy Species in Kruger National Park -------------- - ¶14. (U) The Minister of Environmental Affairs and Tourism Marthinus Van Schalkwyk told a climate change conference in Cape Town that climate change, if not kept in check, could lead to the extinction of certain animals in the Kruger National Park. Van Schalkwyk cited a United Nations Panel on Climate Change report which indicated that a 2.5% rise in temperature could bring about the extinction of 24% to 40% of mammals, 28% to 40% of birds, and 21% to 45% of reptiles in the popular conservation park. He encouraged all countries to fight the eminent catastrophe of climate change. He also added that "South Africa had to take very difficult and important decisions relating to its own efforts to reduce and avoid emissions." He said the country can longer afford not to engage in emission reduction efforts. According to Van Schalkwyk, South Africa is on the path to building a low carbon economy, and to developing mitigation and adaptation mechanisms. (Pretoria News, July 22, 2008) -------------- CITES Criticized for Authorization for Ivory Sales to China -------------- ¶15. (U) The Convention on International Trade of Endangered Species (CITES) has approved the sale of 108 tons of African ivory to China. It noted China's improved crackdown and control of illegal domestic ivory trade as justification for the approval. Botswana (44 tons), Namibia (9 tons),South Africa (51 tons),and Zimbabwe (4 tons) will be authorized to conduct a once-off sale of their ivory stocks. CITES will closely monitor the ivory sales, while the proceeds will be allocated to elephant conservation. The governments are pleased with the CITES authorization, but animal right activists are enraged. Animal Rights Africa (ARA) is concerned that South Africa's authorized sale of 51 tons represents approximately 16,000 elephants. ARA figures indicate that 20,000 elephants are killed annually to service illegal ivory trade. ARA spokesperson Michel Pickover accused South Africa of not being in solidarity with the other African states in opposing ivory trade. Eighteen African nations are opposed to the sales. (Bua News, The Star, and Pretoria News, July 22, 2008) BOST