SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER APRIL 4, 2008

UNCLAS SECTION 01 OF 04 PRETORIA 000704 SIPDIS 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 APRIL 4, 2008 ISSUE PRETORIA 00000704 001.2 OF 004 ¶1. (U) Summary. This is Volume 8, issue 14 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - SA Achieves a 0.9 % Budget Surplus - Manufacturing Activity Dips to Near-Five-Year Low - Trade Deficit Narrows, But Outlook Still Negative - South Africa and Turkey Seek Stronger Economic Ties - SAA and Turkish Airlines to Boost Passenger Volumes through Star Alliance - Smelters and Power - Eskom Favors Sticks over Carrots - Set-Back for Independent Power Production - Under-Utilized Land Targeted for Bio-fuels Crops - Mining Skills Exodus End Summary. -------------- SA Achieves a 0.9 % Budget Surplus -------------- ¶2. (U) Finance Minister Trevor Manuel announced that South Africa had achieved a budget surplus of 0.9% of gross domestic product (GDP) in FY 2007/08. Manuel said a revenue overrun and under spending had pushed the surplus on the state's budget in FY2007/08 from an estimated R10.7 billion (0.5% of GDP) to R18.5 billion (0.9 % of GDP). According to the South African Revenue Service (SARS), personal income tax rose by 20% to R169.1 billion ($21.1 billion), corporate tax by 20% to R143 billion ($17.9 billion),secondary tax on companies by 31% to nearly R20 billion ($2.5 billion), value-added tax (VAT) by 11% to R149.7 billion ($18.7 billion), excise duty by 1% to R18.1 billion ($2.3 billion),fuel levy by 7% to R23.5 billion ($2.9 billion),and customs duty by 13% to R26.7 billion ($3.3 billion). SARS said higher corporate income tax collections were achieved due to higher profits as a result of strong growth in domestic demand and improved commodity prices. Improved tax enforcement and compliance, and a broader tax base had also contributed to higher corporate tax collection. The manufacturing sector made the biggest contribution to corporate tax amounting to R32 billion ($4 billion),or 22% of the total R143 billion ($17.9 billion) paid in corporate tax. This was nearly double the R17 billion ($2.1 billion),or 12% of the total corporate tax paid by the mining sector. However, mining companies paid 29% more tax in FY2007/08 than in the previous year, as commodity prices soared, while manufacturers paid 14% more. According to ABSA Economist Ridle Markus, the weaker rand, on average R7.05 to the dollar last year, compared with an average R6.76 the previous year, has boosted profits for all exporters, as earnings in rand terms are higher when the rand is weaker. Financial services companies paid R15.6 billion (11%),or 27% more, while the wholesale and retail trade sectors contributed R14.2 billion (10 %),17% more than the previous year. Banks contributed R11.3 billion (8%) to the total corporate tax, 30% more than the previous fiscal year. By far the biggest increase in tax was in the tiny recreational and cultural sector, which contributed only 2%, but paid a massive 53% more than the previous year. SARS has achieved revenue overruns almost every year since its inception in 1998. The overruns are often criticized because they have pushed the ratio of tax to GDP to about 29%, which Qis high compared to comparable developing countries, but low compared to developed countries that have a social security system in place. (Business Report, April 2, 2008) -------------- -------------- Manufacturing Activity Dips to Near-Five-Year Low -------------- -------------- ¶3. (U) The Investec purchasing managers' index (PMI) dropped from 46.4 points in February to 43.7 points in March, its lowest level since June 2003. The fall shows that manufacturing is under pressure, mainly as a result of easing consumer demand due to higher interest rates, continued strong inflation and a national power shortage. "The underlying figures paint a deteriorating picture of business conditions in the manufacturing sector," said Andre Roux, head of fixed income at Investec Asset Management, the survey's sponsors. "Given limited prevalence of power outages during the month, the decline is a result of the weaker real economy and high input cost inflation on the manufacturing sector," he said. (Business Day, April 1, 2008) -------------- -------------- Trade Deficit Narrows, But Outlook Still Negative -------------- -------------- ¶4. (U) The South African Revenue Service (SARS) reported that SA's PRETORIA 00000704 002.2 OF 004 trade deficit narrowed sharply from R10.2 billion ($1.3 billion) in February to R5.8 billion ($0.7 billion) in March, as a weaker rand boosted the value of exports. Exports leapt 19.3% to R46.95 billion ($5.9 billion) as the value of cars shipped abroad more than doubled from the previous month, while coal exports rose 17%. Imports increased 6.4% to R52 billion ($6.5 billion),boosted mainly by purchases of machinery, electrical equipment, motor vehicles, aircraft and vessels. Oil accounted for almost 20% of the import bill and demand for capital imports is rising in response to the SAG's infrastructure spending drive. Standard Bank Economist Shireen Darmalingam said the trade balance is likely to stay deep in the red this year, putting more pressure on the rand to depreciate. "The deficit on the trade account, coupled with a large deficit on the current account, leaves the currency vulnerable and in a rather precarious position going forward, she said. The rand has weakened about 15% against the dollar so far this year, and nearly 20% against a trade-weighted basket of currencies monitored by the South African Reserve Bank (SARB). The trend is seen as inevitable given the deficit on the current account, which widened to 7.3% of gross domestic product (GDP) in 2007, a 36-year peak. The deficit was financed by foreign purchases of shares and bonds in recent years, but so far this year the flows have reversed, on rising global risk aversion and concerns over slower local economic growth. (Business Day, April 1, 2008) -------------- South Africa and Turkey Seek Stronger Economic Ties -------------- ¶5. (U) South African Minister of Trade and Industry Mandisi Mpahlwa and Turkish Minister of Energy and Resources Dr Hilmi Guler participated in an inaugural Joint Economic Committee (JEC) meeting in a bid to boost bilateral trade and investment ties. Turkish trade statistics indicate that the volume of bilateral trade for 2007 stood at $2.8 billion with more than 76%, or $2.1 billion, of that arising in the form of South African exports to Turkey. Agenda items for the meeting included a program of action for sectors in which the two countries aim to cooperate. South Africa was Turkey's largest trading partner in Sub-Saharan Africa and Turkey had a stated goal of boosting its trade with Africa to $30 billion by ¶2010. (Engineering News, March 28, 2008) -------------- SAA and Turkish Airlines to Boost Passenger Volumes through Star Alliance -------------- ¶6. (U) The Turkish national carrier joined the Star Alliance group on April 1, 2008. Turkish Airlines is adding an additional 31 destinations to Star Alliance's destinations, and South African Airways (SAA) CEO Khaya Ngqula said it was already in discussions with the Turkish carrier. Ngqula said that talks were under way to sign a code-sharing agreement. SAA Head of Network Development, Alliances and Aero-political Affairs Jason Krause explained that such an agreement would mean that SAA would link its major hub in Johannesburg with Turkish Airline's hub in Istanbul. Krause said QJohannesburg with Turkish Airline's hub in Istanbul. Krause said that Turkish Airlines currently operated three weekly flights between Istanbul and South Africa, flying to Johannesburg and Cape Town. A code-sharing agreement would allow SAA to operate the Turkish carrier's final leg-the stretch between Johannesburg and Cape Town-on its domestic flights. Krause said that this move would add at least 540 additional passengers a week to SAA's domestic flights, and that it would also allow it to sell Istanbul as a destination. Turkish Airlines would also be able to use its aircraft more strategically, he added. (Engineering News, April 2, 2008) -------------- Smelters and Power - Eskom Favors Sticks over Carrots -------------- ¶7. (U) A Business Day editorial questioned BHP Billiton's firing of its banker Standard Bank for suggesting that BHP's Hillside aluminum smelter at Richards Bay be shut down as the smelter did not provide economic value to SA and was consuming a great deal of electricity. The company took umbrage and instructed staff to pull a big chunk of its business from Standard Bank. The editorial noted that the smelters are Eskom's most energy intensive customers, using 2,100 MW or more than five percent of Eskom's total capacity and employ relatively few people. During the power crunch, are there economic benefits that outweigh the energy disadvantages, asked the editorial? A separate report by Standard & Poor's suggested that PRETORIA 00000704 003.2 OF 004 the power shortages are a stress to the economy, rather than a ratings threat. S&P projects that it would take until 2013 before electrical power capacity attains the level required to meet expected demand with a 15% buffer. In January, S&P placed state power supplier Eskom on Credit Watch with negative implications on expectations of a material increase in the capital expenditure program. The rating agency observed that some relief might come from a hike in electricity prices, noting Eskom's recent application for a 60% tariff increase to combat rising coal and fuel costs. Meanwhile, over 100 firms have responded to Eskom's request for cogeneration projects, potentially adding 1,000 to 3,000 MW to the national grid if Eskom can work out power purchase agreements. Eskom continues to criticize residential and small commercial customers for failing to curb their power use, threatening to impose greater load-shedding. Eskom so far has favored "sticks" over "carrots" in seeking to modify consumer behavior. (Business Day, Engineering News, April 2-3, 2008) -------------- Set-Back for Independent Power Production -------------- ¶8. (U) The Department of Minerals and Energy terminated a R5 billion ($650 million) contract with a consortium led by U.S. power producer AES to build two open-cycle, gas turbine plants. The contract was awarded in August 2007 and was the first awarded to an independent power producer (IPP). It was hailed as a boost to independent producers. However, DME has claimed that AES could not meet its obligations and has pulled the plug on the contract. AES Spokeswoman Robin Pence said the company had been content for the contract to lapse because the project was no longer viable. Asked if the parameters were changed after the contract award, Pence said yes, but declined to give further details. AES would have owned and operated the two plants - one near Durban with a generating capacity of 760MW and the other near Port Elizabeth with a capacity of 342MW - and Eskom would have bought the electricity for 15 years. With a combined generating capacity of 1000MW - the equivalent of just less than 3% of SA's current generating capacity - the plants would have provided much-needed peaking power generation capacity to mitigate the country's electricity supply problems. DME Officials emphasized that while the DME was still "looking to go forward with the process of attracting IPPs", the prognosis was bleak with the demise of this deal. The DME could seek an alternative operator, but delays were likely. The two plants were expected to have been operational before the end of 2009. With the termination of AES's contract, that ambitious timeline is unlikely to be kept. This is also a blow to plans to dilute power utility Eskom's monopoly on power generation. The SAG has established a policy requiring that the private sector build 30% of new generating power through IPPs. Despite the government's stated intention of encouraging private sector participation, an unattractive regulatory environment and power prices that are too low to be globally competitive have kept IPPs at Qprices that are too low to be globally competitive have kept IPPs at bay. (Business Day, April 3, 2008) -------------- --- Under-Utilized Land Targeted for Bio-fuels Crops -------------- --- ¶9. (U) South Africa's draft bio-fuels strategy suggests the use of the more than 2.5 million hectares of under-utilized land in the former homeland regions to grow bio-fuel crops. The plan is designed to breach the gap between the country's "haves" and the "have-nots" by allowing new farmers to grow bio-fuel crops. Department of Agriculture Director of Agricultural Engineering Services At van Coller noted that the targeted areas would be in the eastern parts of the country, because climate change is anticipated to increase rainfall in this part of the country. However, he cautioned that it would be costly to develop these areas because of lack of adequate transport and storage infrastructure. Van Coller estimated that it could cost up to $1,900-$2,500/hectare to develop this land, compared to $650/hectare for unutilized commercial farmland. Van Coller added that the final development plan for these areas could cost the SAG over $6.26 billion before bio-fuels production could commence. (Business Day, March 27, 2008 and Business Report, March 26, 2008) -------------- Mining Skills Exodus -------------- ¶10. (U) Gold Fields CEO Ian Cockerill became the fourth South African mining chief within a year-and the third in the gold sector-to announce his resignation. His departure follows the resignations of Anglo Platinum CEO Ralph Havenstein, Harmony Gold PRETORIA 00000704 004.2 OF 004 Mining's CEO Bernard Swanepoel, and AngloGold's CEO Bobby Godsell. Cockerill said he had been made an "intriguing" offer by a company outside the gold sector. Cockerill will be succeeded by CFO Nick Holland, who has held that post for ten years. An industry insider attributed the skills exodus from both senior and middle mining management to government interference, growing concerns about the power crisis and political transition, and an upsurge in crime. A separate news piece noted that mining academics at the Wits School of Mining Engineering are leaving South Africa for salaries three times higher abroad. South Africa continues to provide a good training ground to meet demand abroad as a result of the commodities boom. (Business Day, April 1-2, 2008) BOST