SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER OCTOBER 24,

UNCLAS SECTION 01 OF 04 PRETORIA 002343 DEPT FOR AF/S/; 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 OCTOBER 24, 2008 ISSUE PRETORIA 00002343 001.2 OF 004 ¶1. (U) Summary. This is Volume 8, issue 43 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - Credit Storm Drives SA into Deficit Next Year - Black Middle Class Stronger - Zimbabwean Business Leaders Promote South African Investment - Communications Minister Appeals Altech Judgment - Emirates Suspends Flight on Johannesburg-Dubai Route - PetroSA License for 400,000 Barrels/Day Refinery - Mining Industry Needs Skills - Two Strikes with Different Outcomes - Petroleum Pipeline Denied Passage through South Durban End Summary. -------------- Credit Storm Drives SA into Deficit Next Year -------------- ¶2. (U) Finance Minister Trevor Manuel said that government finances will slip back into a deficit of 1.6% of GDP next year. This would be South Africa's first budget deficit since fiscal year 2005-2006. Presenting the medium-term budget statement to parliament, Manuel said that the global financial crisis will curb growth in South Africa and make it harder to finance the country's ambitious investment plans. His warnings were tempered by reassurances that South Africa's prudent fiscal policies will help it weather a storm expected to tilt developed economies into recession. Manuel said the economic growth rate was set to slow slightly to 3.7% this year from an earlier forecast of 4%, while growth would subside to 3% next year. A key pillar supporting growth is the R600 billion ($60 billion) public sector investment program over the next three years. But funding this program will require a rise in the public sector borrowing requirement, which will climb from 1.3% of GDP this year to 3% of GDP next year. On a positive note, inflation was expected to fall within its official target of 3%-6% in the third quarter of next year as oil and food prices declined. The new budget framework adds R171 billion ($15 billion) to the three-year spending plans tabled in February. Of this, R59 billion ($5.2 billion) will cover the effects of inflation on salaries and other expenses while R50 billion ($4.3 billion) will be for the balance of the R60 billion ($5.3 billion) Eskom loan. (Business Day, October 22, 2008) -------------- Black Middle Class Stronger -------------- ¶3. (U) South Africa's black middle class - the so-called "Black Diamonds" -- number approximately three million and for the first time possess spending power that equals their white middle class counterparts. TNS Research Surveys found that the emerging black middle class has increased its spending power from R180 billion ($18 billion) in 2007 to R250 billion ($25 billion) this year. The majority is becoming more financially savvy, which minimizes the risk of getting caught up in debt, TNS said. An earlier survey by TNS showed that only 10% of the black middle class had been affected by the credit crunch and South Africa's high interest rates. Middle-class black women are faring particularly well, and now account for 40% of the R120 billion ($12 billion) spent annually by all South African women. Almost half of the women interviewed said Qall South African women. Almost half of the women interviewed said they earned over 50% of the household income. Over 80% said they were the main household decision makers when it came to the majority of purchases. Experts say South Africa's emerging black middle class is one of the fastest growing in the world, rising from poverty since the end apartheid in 1994. (Beeld, October 13, 2008) -------------- -------------- Zimbabwean Business Leaders Promote South African Investment -------------- -------------- ¶4. (U) Zimbabwean business leaders who attended a meeting at the Johannesburg Stock Exchange (JSE) said that the country's collapsed economy should not deter South African companies from investing. Executives from the financial, retail, and mining sectors said investing in Zimbabwe took bravery, but the rewards made the risk worth it. Imara Capital Managing Director Sean Gammon commented, "There are already many businesses established in Zimbabwe ready to PRETORIA 00002343 002.2 OF 004 grow, and they do not need a lot of money to capitalize them, so the opportunities are vast." Zimbabwe's hugely untapped mining sector, where South Africa's Implats and Australia's Rio Tinto are scouting for opportunities, is of particular interest to foreign investors. Zimbabwe Stock Exchange Chief Executive Emmanuel Munyukwi said South African companies had the best comparative advantage because they "understand our market better than any of the rest of the world" and should buy assets which are cheap in US dollar terms. While the United Nations and the World Bank had calculated it could take more than 10 years to fix Zimbabwe's economy, Gammon said an overnight relaxation of exchange controls would immediately attract investment and portfolio funds, as well as donor funding, thus quickening the recovery. (Business Day, October 22, 2008) -------------- -- Communications Minister Appeals Altech Judgment -------------- -- ¶5. (U) Communications Minister Ivy Matsepe-Casaburri is taking the Independent Communications Authority of SA (ICASA) communications regulator to court to prevent it from issuing an electronic communications network services (ECNS) license to JSE-listed Altech. A court action pitting a minister against an industry regulator is thought to be unprecedented, and comes after a high court judge ruled that the minister had overstepped her powers. The judge ruled that Altech and about 300 other voice and data carriers were automatically entitled to a license giving them the right to build their own networks. Matsepe-Casaburri has applied to appeal the verdict, claiming it would throw her policy of managed liberalization into chaos, but the appeal has not yet been considered. The Minister also applied for an order to prevent the ICASA from issuing an ECNS license. If the Minister's appeal is rejected, Altech can press ICASA to issue a license so it can begin to construct a network. The high court's ruling that value added network services license holders were entitled to ECNS licenses was a breakthrough for liberalizing the telecommunications industry because companies would no longer have to lease their bandwidth from Telkom, Neotel or cellular operators. (Business Day, October 21, 2008) -------------- -------------- Emirates Suspends Flight on Johannesburg-Dubai Route -------------- -------------- ¶6. (U) Emirates has been forced to drop one of its three daily flights between Johannesburg and Dubai due to slow delivery of aircraft from aircraft manufacturers Boeing and Airbus. The schedule change will take effect in February 2009. Emirates Regional Manager for Southern Africa Fouad Caunhye said that the schedule change is temporary and that the airline will reinstate the flight when it receives new aircraft. A strike at Boeing's Seattle factory delayed the delivery of 39 Boeing 777-300ERs to Emirates. Caunhye commented that the Boeing 777, which he called the workhorse of the fleet, is the aircraft model used on the Johannesburg route. Emirates also ordered 58 Airbus A380s, the first of which was QEmirates also ordered 58 Airbus A380s, the first of which was delivered earlier this year. A technical issue relating to the wiring on the A380 derailed Airbus's delivery schedule last year. Airbus expects to return to its usual delivery schedule late next year. (Business Day, October 20, 2008) -------------- --- PetroSA License for 400,000 Barrels/Day Refinery -------------- --- ¶7. (U) PetroSA, South Africa's national oil and gas company, announced on October 2 that it had received a manufacturing license for its planned 400,000-barrel per day crude oil refinery. The Mthombo refinery is to be constructed in the Coega industrial development zone (IDZ) east of Port Elizabeth in the Eastern Cape at a cost of $11 billion. PetroSA CEO and President Sipho Mkhize said the refinery would ease the country's current and projected fuel shortage. It is also of strategic importance to South Africa's economic development, providing a secure oil supply for the country. The license allows PetroSA to manufacture refined petroleum products subject to obtaining environmental and other permits. Construction is expected to start in 2010 and the refinery should come on stream in 2014. The refinery would be the biggest in Africa and would create about 25,000 direct and indirect jobs. PetroSA previously announced its intention to dedicate the new refinery for PRETORIA 00002343 003.2 OF 004 Venezuelan heavy oil. Critics say that such a big refinery would far exceed South Africa's own requirements and could make existing refineries obsolete. The SAG's response is that it will export any excess to neighboring countries. (Sunday Times, October 12, 2008) -------------- Mining Industry Needs Skills -------------- ¶8. (U) South Africa is not alone in facing the severe skills shortage afflicting the global mining industry, which has been in growth mode since about 2002. Some projects are likely to be slowed or postponed because of the current financial turmoil, but the industry fundamentals still look good for the medium-term as China and India are in a major industrial boom. The lack of qualified, experienced engineers and miners who are able to respond to another mining growth period is likely to be a major constraint. Ernst & Young (E&Y) reports that the shortage of skills in the mining industry is so acute that it is likely to persist even if 5%-10% of the new projects are halted because of the financial crisis. A 20 to 30-year investment horizon is typical of the mining industry, and though it is not easy to halt new projects, the firm had seen some projects cancelled in the past weeks. According to E&Y, HIV/AIDS is the primary cause of mining skills shortages, followed by emigration. Estimates are that a third of the country's engineering graduates have emigrated over the past 40 years. Mining CEOs have had to adopt smarter strategies to develop and retain their workforce. In response to the skills shortage, world leader in coal-to-liquid (CTL) technology Sasol announced an annual financial contribution of $3 million to South African academia to ensure the development of world-class science and engineering graduates. (Business Day, October 16, 2008) -------------- Two Strikes with Different Outcomes -------------- ¶9. (U) Uranium One announced the temporary suspension of operations at its Dominion uranium mine located 150 kilometers west of Johannesburg on October 14. This action follows labor disruptions that started on October 7 in support of employees dismissed for misconduct that culminated in a general strike. A majority of the labor force at Dominion have refused to return to work despite repeated company directives and a court order by the Labor Court to end the strike. The Company began issuing termination notices to the strikers and has dismissed 900 of its 2,500 miners. In the second case, the Black Economic Empowerment (BEE) junior mining company Pamodzi Gold reached a wage settlement with striking workers. Miners were on strike for a week over equalization of wages and demands for pay increases. The agreement includes a 14% increase (about the current inflation rate) in basic salary, an 8% increase in provident fund contributions, and a 44% increase in the housing allowance. (Mining Weekly, October 14, 2008) -------------- -------------- Petroleum Pipeline Denied Passage through South Durban -------------- -------------- ¶10. (U) Communities of south Durban object to Transnet's plan to Q10. (U) Communities of south Durban object to Transnet's plan to establish a pipeline to transport petroleum products from costal refineries to inland territory. Durban South Communities Environmental Alliance (SDCEA) representative Desmond D'sa said that local communities experience heavy air pollution and are already overburdened with 15 other conduit pipelines passing through their areas. The activist said that the pipelines carry hazardous products such as benzene, which put locals at risk of developing asthma or cancer. D'sa also added that over 40 pipeline leaks have been recorded in south Durban since 1995. Transnet Public Relations Manager Saret Knoetze said her company plans to build the pipeline because of heightened demand for transport petroleum product inland. She argued that Transnet has consulted with all relevant parties including SDCEA regarding the proposed initiative. Knoetze emphasized that Transnet was satisfied with the recommendation to go ahead with the project since it was based on a balanced and sound environmental evaluation. SDCEA has threatened to file suit to thwart the proposed pipeline project. (Business Report, October 16, 2008). PRETORIA 00002343 004.2 OF 004 LA LIME