SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER NOVEMBER 14,

UNCLAS SECTION 01 OF 05 PRETORIA 002515 DEPT FOR AF/S/; AF/EPS; EB/IFD/OMA USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND TREASURY FOR TRINA RAND USTR FOR JACKSON 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 NOVEMBER 14, 2008 ISSUE PRETORIA 00002515 001.2 OF 005 ¶1. (U) Summary. This is Volume 8, issue 46 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - Standard & Poor's Dim View of Rand, Rates - JSE Out of Favor, But Not Africa - The Final Frontier: Nando's Opens a Fast-Food Restaurant in Washington - Newly Enlarged Delta to Improve and Expand Africa Service - Vodafone Deal Expected to Unleash Expansion Shackles for Telkom and Vodacom - Build ICT Infrastructure and They will Come - Eskom Dialing for Dollars - AfDB and World Bank Loans - Renewable Energy: Bold Targets, Little Progress - Miners Face Huge HIV/AIDS Challenge - Xstrata-Merafe Venture Shuts Six Furnaces - Cuts Output by 29% - and Improves South Africa's Electricity Reserve Margin - Ivory Sales Fetch Millions in Revenues End Summary. -------------- Standard & Poor's Dim View of Rand, Rates -------------- ¶2. (U) Standard & Poor's (S&P) revised its outlook on South Africa's sovereign credit rating from "stable" to "negative," warning that capital outflows could depress the rand more, keeping inflation high and delaying expected cuts in interest rates. The decision followed a similar step by Fitch Ratings Agency earlier this week, adding to concern that fallout from the global financial crisis may lead to a downgrade to South Africa's investment-grade credit ratings. Treasury Director General Lesetja Kganyago described the news as "disappointing" and a reminder that South Africa should stick to the prudent fiscal policies which have supported its credit rating at a time when other countries are being downgraded. S&P pointed out that if South Africa kept its commitment to growth-enhancing reforms and prudent fiscal policies after the election, this would support its rating. S&P affirmed its BBB+ rating for South Africa's foreign currency debt, and said local banks should weather the domestic slowdown well, as they had limited exposure to the global credit crunch. But at the same time, Fitch revised its outlook for three of South Africa's biggest banks, ABSA, Investec and Nedbank, from "stable" to "negative." Experts regarded the downgraded outlook for the banks as inevitable given Fitch's revision to the country's rating outlook. Fitch said the step reflected "a deteriorating macro economic environment and its anticipated impact on the financial performance and financial position of the banks." Banking Association Head Cas Coovadia described the outlook revision as "ridiculous." But banking stocks fell in response to the news and followed a further plunge in global equity markets. (Business Day, November 11, 2008) -------------- JSE Out of Favor, But Not Africa -------------- ¶3. (U) Foreign investors may be dumping South African equities for US bonds, but the outside world is far from turning its back on Africa as a whole. Stanlib Director of Global Investment Marketing Dylan Evans said that anyone who followed the money would have witnessed a growing flight from South Africa, yet foreign direct investment (FDI) in the rest of Africa remained remarkably robust. Qinvestment (FDI) in the rest of Africa remained remarkably robust. "During the first 22 days of October, foreigners sold a net R22.6 billion ($2.1 billion) of South African equities, the largest monthly sell-off by foreigners ever recorded," said Evans. From January through October, foreigners sold a net R43.7 billon ($4.1 billion) compared with last year when they bought a net R64.1 billion ($6.1 billion) of South African equities and a net R220 billion ($21 billion) of inflows between 2004 and 2007. The dramatic acceleration of foreign equity sales and some bond sales had weakened the rand, making it the worst-performing emerging-market currency this year. Over the same period, the Johannesburg Stock Exchange (JSE) lost about 30% of its value in rand terms and 58% in dollar terms. Evans said that elsewhere in Africa things were looking rosy, with a total of R328 billion PRETORIA 00002515 002.2 OF 005 ($31.3) in FDI flowing into Africa in the 12 months to September. Head of Pension Reform Strategy at Liberty Corporate Benefits Baron Furstenburg said the recent flight of foreign investors from South African equities and bonds had drawn attention to the need for this country to supplement "hot money" from offshore fund managers with long-term domestic capital. (Business Times, November 9, 2008) -------------- The Final Frontier: Nando's Opens a Fast-Food Restaurant in Washington -------------- ¶4. (U) South Africa's Portugese-style chicken chain Nando's has opened its first U.S. restaurant in Washington, D.C. Nando's is expanding its international operation and now has 800 restaurants in more than 26 countries. Nando's CEO Kevin Utian said the US market was ready to embrace the brand and its "unique taste, flavor and positioning." Utian said the group was looking at further expansion in Africa and across the globe but was doing so conservatively by opening restaurants one-at-a-time in different countries after studying the markets there. He said Nando's, which is 60% owned by its franchisees and employs 7,000 people in South Africa, was facing the problems of slowing economies, market volatility, food inflation, and rising product costs. "Debates on the readiness of US markets, who are renowned mass consumers, to receive a traditional food offering such as ours, have continued for years," Nando's co-founder Robert Brozin said. He said the branch in Washington was a milestone for the brand. Brozin said the consumer response to date had been "terrific." He said Nando's, which celebrated its 21st birthday on Friday, had always had a vision of expanding into the US. Brozin commented that even at the beginning of his venture, he believed that he could build "a global brand... the growth of the Nando's business over a mere 21 years has been phenomenal and now we've tackled the final frontier. Washington DC is our first step into the U.S. and we're positive that Nando's will be well received." Today the brand has stores across South Africa, the United Kingdom, Canada, Australia, and New Zealand. It also operates in Israel, Malaysia, Pakistan and India. South Africa remains Nando's cash cow with about 280 stores, followed by the UK with about 175. There are a similar number in Australia and New Zealand. (Business Day, November 11, 2008). -------------- Newly Enlarged Delta to Improve and Expand Africa Service -------------- ¶5. (U) Delta Airlines announced that it will replace its current flight from Johannesburg to Atlanta via Dakar with a daily non-stop service. The airline is upgrading the aircraft used on the route and plans to operate the new service with a Boeing 777-200LR aircraft beginning June 2, 2009. The aircraft is among the newest in Delta's fleet and features its 180-degree full flatbed in the Business Elite class. Delta will be the first U.S. airline to offer non-stop roundtrip service between South Africa and the United States. This announcement forms part of a Delta's global expansion announced on November 11. Delta became the world's largest airline after its QNovember 11. Delta became the world's largest airline after its merger with Northwest. The expansion includes 18 new trans-Pacific and trans-Atlantic routes in 2009 allowing the airline to provide service to nearly all of the world's major travel markets. The Boeing 777-200LR features a two-class service with up to 276 seats - 43 Business Elite seats and 233 seats in economy. Delta is the leading airline connecting Africa to the U.S and has unveiled plans to rapidly expand in Africa next year. By June 2009, Delta will be the only carrier to offer service between North, East, South, and West Africa and the United States and (subject to government approvals) will operate from 12 cities in 10 African countries. In addition to the non-stop Johannesburg flight, Delta will fly between Nairobi and Atlanta via Dakar (four times a week),Monrovia and Atlanta via Cape Verde (once weekly),Abuja and Atlanta via Cape Verde (twice weekly),Luanda and Atlanta via Cape Verde (twice weekly),Malabo and Atlanta via Cape Verde (once weekly) and Lagos and New York (non-stop, five times a week). (Delta Airlines Press Release, November 12, 2008) -------------- Vodafone Deal Expected to Unleash Expansion Shackles for Telkom and Vodacom PRETORIA 00002515 003.2 OF 005 -------------- ¶6. (U) UK-based Vodafone's acquisition of a further 15% stake of mobile-operator Vodacom will result in over R20 billion ($2 billion) in foreign direct investment into the South African economy and facilitate another significant listing on the JSE - that of Vodacom - at a time when global markets are tumbling and the South African current account deficit threatens to increase. State-controlled Telkom, which owned 50% of Vodacom, will receive the acquisition price of R22.5 billion ($2.3 billion) minus debt of about R1.55 billion ($155 million). The South African government and the Public Investment Corporation, which own a combined 58% of Telkom, will vote in favor of the transaction and will become significant shareholders in Vodacom. Telkom will retain half of the Vodafone money. The other half will be distributed to shareholders as a special dividend. Vodafone's holdings in Vodacom will increase from 50% to 65%. Telkom's remaining 35% stake in Vodacom will be distributed to shareholders via a JSE listing of Vodacom. Telkom CEO Reuben September said Telkom would be free to compete, to expand geographically, and to bring fixed and mobile services to customers. Telkom is expected to either create a mobile service to complement its fixed-line operations or enter into partnership with Cell C since the South African mobile market is already saturated. Telkom had previously looked to Vodacom to converge fixed and mobile offerings to customers, but this had not materialized. Telkom was also bound by a restrictive shareholders' agreement with Vodafone. "We have realized that being married to a competitor, however lucrative, is not a bond made in heaven," September said. Now that Telkom has been freed from its shackles, the challenge will be to show that it can expand and diversify on its own. For Vodacom, the deal relieves it from the restrictions of having joint controlling shareholders with restrictive agreements in place. It can also extend its expansion in Africa except into countries where Vodafone already has a presence (Ghana and Kenya). Vodafone has agreed to keep the Vodacom brand alive for the African expansion creating a boon for Vodacom's South African Black Economic Empowerment (BEE) partners. (Business Times, November 9, 2008, Business Day, November 7, 2008, and Engineering News, November 8, 2008) -------------- Build ICT Infrastructure and They will Come -------------- ¶7. (U) SEACOM President Brian Herlihy told the press that the prospect of SEACOM landing a 15,000 kilometer fiber-optic, undersea cable on South Africa's shores next year has forced broadband prices down by 90%. The SEACOM project will be the first undersea cable to connect East Africa to the rest of the world through links to India, England, and France. Herlihy noted that when SEACOM announced its intention to launch the $600 million undersea cable project, operators in South Africa were pricing broadband at R8,000 ($800) per megabit per month and that prices have now dropped as low as R800 ($80) per megabit per month. "We have created competition QR800 ($80) per megabit per month. "We have created competition before we even landed the cable," said Herlihy. SEACOM plans to reduce these prices again when it enters the market in June 2009 with a price of R435 ($43) per megabit per month. The SEACOM cable is well into its production stage -- just last week it broke ground in Maputo for the Mozambique landing station, which follows similar developments in Mombassa, Kenya. He said the project is set to begin construction of the South African and Tanzanian landing stations by next month. Besides South Africa, Mozambique, Kenya and Tanzania, the SEACOM cable will also link to Madagascar, Ethiopia, and Egypt. Nearly 90% of the SEACOM cable has been manufactured and the first load of assembled cable and repeaters has been loaded on a Tyco Telecommunications' ship for installation. The second ship will reach Africa in early 2009. The project is 76.25% African-owned, with South Africa's Shanduka Group (12.5%),Venfin Limited (25%),Convergence Partners (12.5%) and Kenya's Industrial Promotion Services (26.25%) all on board. The remaining 23.75% is owned by Herakles Telecom, part of the New York-based Blackstone group. "With only eight months to go before the system is ready for service, SEACOM remains set to become the first cable to connect East and Southern Africa to the rest of the world with plentiful and inexpensive bandwidth," emphasized Herlihy. He said a simple calculation shows that South Africa needs about 50 gigabits of international capacity to service the one million broadband subscribers in the country, but currently has only 10 gigabits. "International capacity has been choking the data market in Africa for years now," added Herlihy. Initially SEACOM will deliver 80 PRETORIA 00002515 004.2 OF 005 gigabits of international capacity through its cable but can meet more demand easily because the cable has a potential capacity of 1.28 terabits (1,280 gigabits). SEACOM has already sold two-thirds of the initial 80 gigabits capacity. In South Africa, SEACOM has had to partner Neotel for the landing station because only Neotel, Telkom, or Sentech are licensed to lay undersea cables. Herlihy noted that because of South African politics, SEACOM had to work with a partner such as Neotel to land the cable, unlike in Tanzania and Kenya where it has set up licensed local subsidiaries. He says that although SEACOM partnered with Neotel to land the cable, the international capacity will be sold using an open-access model so that any operators can buy capacity from SEACOM. (Mail & Guardian, November 7-13, 2008) -------------- Eskom Dialing for Dollars - AfDB and World Bank Loans -------------- ¶8. (U) State-owned electricity producer Eskom signed a R4.9 billion ($500 million) 20-year loan with the African Development Bank (AfDB) as part of its capital-raising plans to fund its R343 billion ($35 billion) investment program. Eskom also announced that it had secured a further Euro 300 million ($376 million) from the European Investment Bank. Eskom said that since April it had received debt commitments of R19 billion ($1.8 billion),but still needs R11 billion ($1 billion) by the end of next March to keep the funding to expand its power generation and distribution on track. The National Treasury confirmed that Eskom and the World Bank have entered into talks about a $5 billion loan. Eskom CEO Bongani Nqwababa said that because of the global financial crisis, Eskom would wait six to 12 months before starting to raise fresh cash. (Engineering News, Business Report, Times, Business Day, November 11, 2008) -------------- -- Renewable Energy: Bold Targets, Little Progress -------------- -- ¶9. (U) World Wildlife Fund South Africa hosted a National Renewable Energy Conference in Johannesburg November 6-7. The conference garnered civil society and private sector interest in renewable energy as a way to mitigate power shortages and reduce the country's carbon footprint. The U.S. Department of Energy (USDOE) presented information on adopting green building codes. The 1998 South African government white paper on energy policy called for renewable energy to comprise 5% of total energy consumption by 2013, but progress has been slow. Participants at the conference called for an even higher renewable energy target of 15%. The Darling wind farm in the Western Cape powered up on November 7, becoming South Africa's first significant renewable energy power initiative. The wind farm delivered 5.2 megawatts (MW) of energy to the power grid. Eskom hopes to establish a demonstration plant for a 100 MW solar concentrating tower in the Northern Cape, with interest from U.S. firm SolarReserve to provide the technology. The Department of Minerals and Energy and the Development Bank of Southern Africa have established a $8.3 million renewable energy market transformation Qestablished a $8.3 million renewable energy market transformation program to assist investors in overcoming obstacles preventing growth in the sector. An energy consultant noted that little progress has been made in the development of renewable energy projects to date because of regulatory uncertainty and unclear incentives. The electricity regulator NERSA is expected to finalize feed-in tariffs for renewable energy by February which would clarify the investment environment. (Mail & Guardian, Engineering News, Business Day, November 11, 2008) -------------- Miners Face Huge HIV/AIDS Challenge -------------- ¶10. (U) A recent South African Business Coalition Against HIV/AIDS conference focused attention on the effect of HIV/AIDS on the production and well-being of mining workers and families. Benchmarks Foundation estimates that about 16-30% of mine workers are infected with HIV/AIDS. Benchmarks researcher David van Wyk said it is difficult to determine exact HIV/AIDS prevalence rates because the majority of workers are resistant to participating in HIV voluntary testing programs. Mining employees are afraid to disclose their status because they fear discrimination, PRETORIA 00002515 005.2 OF 005 stigmatization, and punishment or penalization for a lack of productivity. Mining supervisors are alleged to be unsupportive of the HIV/AIDS- stricken and likely to punish sick workers. One expert said most mining companies have good voluntary testing and counseling programs, but infected mine workers do not seek antiretroviral treatment because of the potential for retribution from employers. (Business Day, November 11, 2008) -------------- -- Xstrata-Merafe Venture Shuts Six Furnaces, Cuts Output by 29%, and Improves South Africa's Electricity Reserve Margin -------------- -- ¶11. (U) The world's largest ferrochrome producer Xstrata-Merafe Resources halted six of its South African ferrochrome furnaces because of slowing global demand and competition from major steel and iron ore producers. The six furnaces represent 500,000 tons (or 29%) of the world's annual ferrochrome production. Ferrochrome is used mainly in the production of steel. Xstrata said the shutdown is temporary and it expects to redeploy personnel within its operations. Xstrata also announced that the closures of the highest-cost furnaces would result in energy savings of 300-400 MW of power and thereby contribute to easing the power crisis. This contribution represents about 10% of state power company Eskom's electicity savings reduction target. (Mining Weekly, Business Report, November 11, 2008) -------------- Ivory Sales Fetch Millions in Revenues -------------- ¶11. (U) South African National Parks (SANP) auctioned 6.51 tons of government-owned elephant ivory in November. The Convention on International Trade in Endangered Species (CITIES) approved the sale. The sale fetched over $6.7 million. SANP CEO Dr. David Mabunda said SANP would use a significant amount of the funds amassed to "stamp down on poaching of any kind", and would also direct parts of the funds to elephant-related research, general conservation, buying more land, and employing additional park rangers. The SANP conducted the auction in Pretoria. Buyers included 12 Chinese and 22 Japanese nationals who bid off of brochures depicting the ivory lots. The day before the sale, the bidders viewed the lots at Kruger National Park, where the ivory was stockpiled. Botswana, Namibia and Zimbabwe held similar auctions. According to CITES General Secretary Willem Winjnstekers the four countries auctioned a total of 101 tons of ivory. The four sales generated nearly $15 million in revenues. The International Fund for Animal Welfare was opposed to the sales. Opponents of the sales argued the revenues from the sales would not make any significant impact on poaching, and might stimulate the demand for ivory. (Pretoria News, November 17, 2008 and www.iol.co.za November 6, 2008)