SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER AUGUST 15,

UNCLAS SECTION 01 OF 04 PRETORIA 001822 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 15, 2008 ISSUE PRETORIA 00001822 001.2 OF 004 ¶1. (U) Summary. This is Volume 8, issue 33 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - MPC Leaves Interest Rate Unchanged - SADC to Launch Free Trade Area - Green Rating System for SA Property Market - Transnet Considers Enlarging Diesel Locomotive Order - Transnet Proposes Development of Dedicated Freight Ring Project - Moody's Downgrades Eskom and Maintains Negative Outlook - Eskom Expected to Seek Funds from World Bank for Expansion Program - Koeberg Nuclear Unit Resumes Operation - DME Wins Turf Battle - Titanium Miners Benefits - Government Promotes Call Centers - ICT Sector Growth Likely to Be Policy Driven End Summary. -------------- MPC Leaves Interest Rate Unchanged -------------- ¶2. (U) The South African Reserve Bank (SARB's) Monetary Policy Committee (MPC) has left the policy interest rate (the repo rate) unchanged at 12%, with the prime lending rate remaining at 15.5%. Few analysts were surprised, given the sharp slowdown in consumer demand, the soaring cost of debt, and falling asset prices. Explaining the decision, SARB Governor Tito Mboweni said, "The economy is showing signs of distress, and a lot of folks are in distress." Nevertheless, Mboweni warned against complacency, as CPIX inflation (CPI less mortgage interest) is expected to peak at 13% in the third quarter of 2008. Inflation is then expected to decline gradually and to fall below the upper end of the inflation target range in the second quarter of 2010. (Beeld and Business Day August 14-15, 2008) -------------- SADC to Launch Free Trade Area -------------- ¶3. (U) The 14-country Southern Africa Development Community (SADC) will launch a free trade area at a summit hosted by South Africa this weekend. The intention to become a free trade area was originally decided in Maseru, Lesotho in 1996. The trade protocol signed in Maseru came into effect in September 2000, with an eight-year time-line to create the free trade area. Members are expected to approve a road map towards a customs union at this latest summit. Minister of Trade and Industry Mandisi Mpahlwa said a study commissioned by SADC showed that since the Maseru decision, 85% of trade among the SADC countries had been liberalized, and would be fully tariff-free by 2012. "But regional economic integration is not only about the removal of tariff barriers, but also addressing non-tariff barriers," Mpahlwa said. He added that the launch of the free trade area is not an end in itself; but the beginning of a process to build productive and trade capacity, improve the competitiveness of industries, and address the supply side constraints that inhibit the region from benefiting from better terms of trade in the region. (Beeld, August 14, 2008) -------------- Green Rating System for SA Property Market -------------- ¶4. (U) The Green Building Council of South Africa (GBCSA) will launch the first environmental rating system for the country's property market. GBCSA will launch Green Star South Africa at its Qproperty market. GBCSA will launch Green Star South Africa at its inaugural conference in November 2-4 2008. The rating system is modeled on the Australian, UK and U.S. systems, which are characterized by rigorous certification processes. GBCSA CEO Nicolas Douglas said Green Star SA will have several distinctive rating tools which would be able to rate different property sectors such as residential, office and public buildings, hotels, and shopping centers. The first phase of the ratings system will target office buildings due to industry demand. Council Chairman Bruce Kerswell said "Green Star is a crucial first step in bringing an effective, industry-driven initiative to South Africa". Douglas PRETORIA 00001822 002.2 OF 004 noted from international experience that green buildings have higher rents, better occupancy rates, and perform better operationally. (Business Day, August 13, 2008) -------------- Transnet Considers Enlarging Diesel Locomotive Order -------------- ¶5. (U) State-owned freight logistics and transport group Transnet is reported to be considering the expansion of its purchase of diesel locomotives. Transnet is in the midst of tender negotiations with U.S.-based Electromotive Diesel (EMD) for 212 diesel locomotives valued at more than R6 billion ($780 million) and is reported to have included an option to expand that procurement to 400 new diesel locomotives. CEO Maria Ramos said the tender process was well under way for the 212 diesel locomotives and that any enlargement would be pursued on the basis of a supportive business case. It was unclear as to what such a move would mean for the group's five-year, R80 billion ($10.4 billion) capital-investment program, for which it would need to raise R36.6 billion ($4.8 billion) on the capital markets over the next three years to close an anticipated funding gap. Rail-related projects comprised nearly half, or R38 billion ($4.9 billion),of the group's total investment plan. The existing procurement plan for 416 locomotives makes up the lion's share of that budget: 110 new dual-voltage locomotives for the expansion of the coal line; 44 new locomotives for the initial expansion of the iron-ore export channel; 50 "like-new" EMD diesel locomotives; and 212 new EMD diesel locomotives for use primarily in the general freight business (GFB). The investment plan, and its possible enlargement, is in line with what Ramos had dubbed the group's strategic shift "from turnaround to growth." This new strategy emphasizes the potential synergies between Transnet's port, rail, and pipeline units. More specifically, it seeks to expand the role of Transnet Freight Rail, which had lost market share to road transport over the past two decades. (Engineering News, August 12, 2008) -------------- Transnet Proposes Development of Dedicated Freight Ring Project -------------- ¶6. (U) The Transnet 2008 annual report proposes the creation of a "Gauteng freight ring" project to eliminate competition for limited rail capacity in the province. The report noted that since "passenger services can only be delayed for short periods of time, freight is (currently) expected to play a secondary role." To address this challenge, Transnet has developed a plan for the creation of a dedicated freight ring that will function independently from commuter traffic. The benefits would include uninterrupted flow of freight through Gauteng and the alignment of future industrial growth points with terminal positions. The group said the project would be phased in over a 10 to 15-year period after critical bottlenecks are addressed. (Engineering News, August 12, 2008) -------------- Moody's Downgrades Eskom and Maintains Negative Outlook -------------- ¶7. (U) Moody's downgraded the local currency rating of state-owned Q7. (U) Moody's downgraded the local currency rating of state-owned utility Eskom by four levels, from A1 to Baa2 (the second lowest investment grade). This downgrade was the result of: deterioration in Eskom's stand-alone credit profile; the negative financial impact of lower-than-requested tariff changes recently awarded by the national regulator; and an assessment of financial support by the government. National Treasury announced last month that it would fast-track disbursement of R60 billion ($7.8 billion) of fiscal support to Eskom, and would consider providing guarantees "to enable Eskom to access funding otherwise not available." In addition to the local currency rating downgrade, Moody's also lowered the foreign currency rating by three levels, from A2 to Baa2. Analysts think that other rating agencies are likely to follow Moody's lead, but believe that Eskom's investment grade rating status will be maintained. Deputy Finance Minister Jabu Moleketi also said he expected Standard & Poor's and Fitch Ratings would follow Moody's in downgrading Eskom's credit rating. (ABSA Capital Research, Business PRETORIA 00001822 003.2 OF 004 Day, and Engineering News, August 13, 2008) -------------- Eskom Expected to Seek Funds from World Bank for Expansion Program -------------- ¶8. (U) Eskom might seek to borrow up to $1 billion a year from the World Bank over the next five years as the utility adjusts its funding strategy to cope with difficult global markets and recent credit ratings downgrades. These loans, which would be backed by government guarantees, would be the largest yet extended by the World Bank to South Africa. The World Bank could also help with short-term overdraft-type facilities that Eskom could draw on if it needed cash. News of talks with the World Bank emerged after rating agency Moody's downgraded Eskom's credit rating, a move likely to raise the cost of the R150 billion ($19.5 billion) Eskom planned to borrow to help fund its expansion program. The utility originally had planned to borrow about 60% of this amount on foreign markets, but would moderate its plans for now. Eskom Finance Director Bongani Nqwababa said Eskom was "rechecking" it's funding strategy and would likely focus more on borrowing locally, from development finance agencies such as the World Bank and African Development Bank, and from export credit agencies. The crunch for Eskom is expected to be mainly in the next five to six years as it ramps up spending on its two new coal-fired power stations. Its bankers are putting together a foreign syndicated loan. Eskom is also in talks with the German export credit agency on a $700 million deal related to boilers Hitachi Europe will supply to its new coal-fired power stations. (Business Day and Business Report, August 13, 2008) -------------- Koeberg Nuclear Unit Resumes Operation -------------- ¶9. (U) Eskom announced that a unit of the Koeberg nuclear power plant that was shutdown in July after a hydrogen leak on the generator's cooling system has returned to service. The unit started generating electricity just before midnight on August 13, and Eskom stated that the plant would operate at full capacity by August 15. Eskom initiated a controlled shutdown of the unit on July 21. Chief Generations Officer Brian Dames said the shutdown had placed strain on the national power grid, particularly in the Western Cape. "The increased use of the two new Open Cycle Gas Turbine (OCGT) stations in the Cape, together with electricity savings, resulted in the supply of electricity continuing uninterrupted during the period when the Koeberg unit was out of service," said Dames. (Engineering News, August 14, 2008) -------------- DME Wins Turf Battle - Titanium Miners Benefits -------------- ¶10. (U) A twelve-year old turf battle between the Department of Minerals and Energy (DME) and the Department of Environmental Affairs and Tourism (DEAT) came to an end when DME approved titanium dune mining on the Wild Coast. The DME granted Australian mining company Mineral Commodities (MRC) rights to extract titanium from a part of the Xolobeni Mineral Sands project located on the Indian Ocean coast. The sand dunes are reported to contain over 346 metric QOcean coast. The sand dunes are reported to contain over 346 metric tons of titanium, with an estimated value of R11 billion ($1.46 billion). DME spokesperson Sputnik Ratau was adamant that decisions on mining applications should not be driven "only [by] environmental issues." DEAT and the Sustaining the Wild Coast group are displeased with the decision and argue that the mining project will cause irreparable harm to the ecosystem, which is of international stature. They are also concerned that the environmental, land, and mineral rights of local inhabitants will be violated. Observers maintain that this victory could be DME's last one before the National Environmental Management Act is amended to make DEAT the ultimate authority to oversee mining applications. (Business Report, August 7, 2008) -------------- Government Promotes Call Centers -------------- ¶11. (U) Department of Trade and Industry (DTI) Minister Mandisi PRETORIA 00001822 004.2 OF 004 Mpahlwa announced that interest in South Africa's business processing and outsourcing (BPO) sector remained high with a new 600-seat call center planned for the Free State. He described the BPO sector as one of the "low-hanging fruits" in which government was implementing its industrial policy. The South African Government (SAG) views the BPO sector and call centers as effective job creation vehicles, particularly in poor rural areas. In July, President Thabo Mbeki reported that BPO investments worth R658 million ($85 million) have been made, and that the sector had created 9,132 jobs. The SAG provides training to unemployed students and graduates through the Monyetla work readiness inception program, and hopes to train 30,000 learners over a four-year period through the program. The first batch of 1,000 trainees have already been absorbed by the industry, and the SAG would be training a further 2,000 people this year. Work in establishing call centers in far-flung areas had gotten off to a good start, Mpahlwa said, stressing that the momentum could be sustained. ABSA Bank recently announced that it had become the first investor in the BPO cluster of the new Coega Industrial Development Zone, with an investment that would create 94 new jobs. In 2007, TeleTech established a call center in Cape Town under the DTI's BPO incentive program. Mpahlwa expected the BPO sector to grow globally by 50% a year over the next four years. (Engineering News, August 11, 2008) -------------- ICT Sector Growth Likely to Be Policy Driven -------------- ¶12. (U) Industry advisory firm BMI TechKnowledge explained that, while Africa's mobile market had been growing, internet and broadband penetration rates remained low. It asserted that regulatory interventions could bring down prices, improve services availability, and enable growth. The firm cited local loop unbundling, access to international gateways, the legislation of Voice-over Internet Protocol (VoIP),as well as convergence, as regulatory trends that could improve the continent's access to Internet and broadband services. BMI TechKnowledge ICT Research Director Brian Neilson said that fixed-mobile convergence was one of the trends that would start affecting competition within the sector, and would subsequently drive down prices. Neilson also said. "Broadband is the new growth area which [operators] need to take note of." A recent report showed that more than $6 billion would be spent on ten submarine and terrestrial fiber-optic cable infrastructure projects in Africa over the next two years. Neilson acknowledged that Africa could experience a bandwidth oversupply if all ten of the planned projects came on stream: he explained that these cables were designed with a combined capacity of ten terabits a second, while demand from Africa was only expected to reach two terabits a second by 2019. Nevertheless, Africa needs some of these cables to ensure that demand did not outstrip supply. For example, South Africa needs additional bandwidth capacity to meet the digital broadcasting requirements for the 2010 FIFA World Cup. According to Neilson, only four projects were likely to succeed: privately-owned QNeilson, only four projects were likely to succeed: privately-owned SEACOM, the East Africa Submarine Cable System (EASSY),the East Africa Marine System (TEAMS) consortiums, and the South African Government-led Infraco African West Coast Cable (AWWC). He expected the NEPAD-led Uhurunet project to only come on stream at a later stage. (Engineering News and Business Report, August 12-13, 2008) BOST