SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER JANUARY 30,

UNCLAS SECTION 01 OF 04 PRETORIA 000178 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 JANUARY 30, 2009 ISSUE PRETORIA 00000178 001.2 OF 004 ¶1. (U) Summary. This is Volume 9, issue 5 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - Big Rate Cut Expected as Inflation Plummets - South Africa's Leading Indicator Confirms Dismal Growth Outlook - Sharp Rise in Company Failures - SARS Seizes Huge Haul of Illegal Imports - Emirates to Fly Direct to Durban by October - MTN and Neotel Team Up to Build National Cable Infrastructure to Connect to the Undersea Cable Projects in Time for 2010 - Beyond Eskom - Nuclear was too Big for State Utility Alone - PBMR Nuclear Fuel Breakthrough - Ferrochrome - Decimating Production - National Space Agency Bill Passed into Law End Summary. -------------- Big Rate Cut Expected as Inflation Plummets -------------- ¶2. (U) The annual increase in the CPIX inflation (CPI less mortgage cost) eased from 12.1% in November to 10.3% in December, its lowest level in nine months. The lower inflation rate was driven primarily by a sharp fall in fuel prices. Government bonds and banking shares rallied on the news, which fanned speculation that the South African Reserve Bank (SARB) will cut rates this year in a bid to keep South Africa's flagging economy out of the global recession. At its December meeting, the SARB's Monetary Policy Committee cut the policy interest rate by half a percentage point. That marked the start of an easing cycle in local interest rates, which climbed by five percentage points between June 2006 and June 2008 as the SARB fought soaring inflation. Since then, slowing domestic demand and a steep plunge in prices for commodities that make up more than 60% of South Africa's exports have curbed growth to a decade low. (Business Day, January 29, 2009) -------------- South Africa's Leading Indicator Confirms Dismal Growth Outlook -------------- ¶3. (U) South Africa's leading indicator of economic activity posted its lowest fall in over four years (-14.3% year-on-year (y/y)). The fall marks the 17th consecutive month of y/y declines and confirms the dismal growth outlook for the South African economy. South Africa's economic growth slowed to just 0.2% quarter-on-quarter (q/q) in Q3 08, the slowest q/q growth in a decade and looks set to continue its downward trend. Experts speculate the South African economy may already be in the midst of a technical recession, with the latest projections pointing to negative q/q growth rates in Q4 08 and Q1 09. Given slowing global and domestic activity as evident in many high frequency indicators, experts forecast the South African economy's average growth rate will decline from a 3.3% average for 2008 to a sub-1% average growth rate for 2009. (ABSA Newsletter, January 27, 2009) -------------- Sharp Rise in Company Failures -------------- ¶4. (U) Company failures soared by more than 68% in December, taking the overall increase last year to 4.7% as more firms buckled under the pressure of slowing demand and steep debt costs. Personal bankruptcies also leaped 51.5% in the first 11 months of last year, Qbankruptcies also leaped 51.5% in the first 11 months of last year, although there was a small decline in November, according to Statistics South Africa. Companies should come under more pressure this year as consumers continue to rein in their spending. Consumer spending, which is the economy's main engine, shrank by 0.8% in the third quarter of 2008, its first contraction in a decade. (Business Day, January 28, 2009) -------------- PRETORIA 00000178 002.2 OF 004 SARS Seizes Huge Haul of Illegal Imports -------------- ¶5. (U) The South African Revenue Service (SARS) has confiscated more than 100 tons of clothing imports since the mid-December launch of a customs crackdown on goods imported illegally from Asia. The value of the goods has not yet been established. Since the launch of the campaign, customs monitoring has increased. Up to 15% of shipments have been examined since the beginning of the crackdown, in contrast to only 2-3 % in the past. The increased scrutiny has bumped up shipping costs and lead times on delivery by about a week. SARS cracked down on imports after discovering large-scale under-invoicing of clothing imports from China. Trade statistics showed that textiles and apparel worth R15.3 billion ($1.5 billion) were exported from China to South Africa last year. However, invoices reflected imports worth only R6.1 billion ($614 million), representing a 60% shortfall in invoicing and a sign of large-scale fraud, the Department of Trade and Industry said at the end of last year. (Business Day, January 28, 2009) -------------- Emirates to Fly Direct to Durban by October -------------- ¶6. (U) Dubai-based Emirates Airlines (Emirates) has announced its intention to resume plans to launch direct flights to Durban. Emirates resolved the aircraft shortage problem that caused it to suspend its flight plans late last year. Emirates Southern Africa Regional Manager Fouad Caunhye announced that beginning in October 2009 Emirates will begin to serve Durban along with Johannesburg and Cape Town. Durban's geographical location on the east coast of South Africa makes it a natural hub for trade with the Indian Ocean and Asia Pacific countries. Durban handles 50% of the country's break-bulk cargo and 65% of its containerized traffic. The Airports Company of South Africa is building a new international airport in Durban to accommodate increased traffic for the 2010 FIFA World Cup and larger, long-haul aircraft. (Travel Hub, January 22, 2009) -------------- -- MTN and Neotel Team Up to Build National Cable Infrastructure to Connect to the Undersea Cable Projects in Time for 2010 -------------- -- ¶7. (U) Telecommunications companies MTN South Africa and Neotel announced plans to collaborate on a 5,000 kilometer fiber-optic cable to service South Africa's major cities. The cable would be installed within the next two years, and would cost between R1.7 billion ($171 million) and R2 billion ($200 million). MTN South Africa Managing Director Tim Lowry said this was a landmark agreement and was the largest collaboration in the South African ICT industry to date. The two-year project's costs would be equally shared between MTN and Neotel. Lowry estimated that by combining the two companies' resources, each company would be saving between R400 million ($40 million) and R500 million ($50 million). The project would be divided into several phases, with the first phase offering connectivity between Johannesburg and Durban, and linking Qoffering connectivity between Johannesburg and Durban, and linking up to Richards Bay where the under-sea East African Submarine Cable System (EASSY) and SEACOM will be landed. The first phase would likely take about seven months to complete, and would cost an estimated R200 million ($20 million). Construction for this phase would start in the first week of March, with the completion date scheduled before the start of the 2010 FIFA World Cup. Other phases would link Durban with Port Elizabeth, Port Elizabeth with Cape Town, Ladysmith with Polokwane, and Polokwane with Pretoria. (Engineering News, January 15, 2009) -------------- Beyond Eskom - Nuclear was too Big for State Utility Alone -------------- ¶8. (U) The South African government has established a nuclear task team to develop a framework for procuring a nuclear technology partner to support both the nuclear power station build program and the associated industrialization process. This came after Eskom cancelled the tender for a 3,000 megawatt nuclear power station, based on funding and affordability concerns. The task team plans to PRETORIA 00000178 003.2 OF 004 look for a partner that would co-develop the nuclear industry in South Africa and assist in the broadening of the nuclear base, which currently consists of only the Koeberg power station. The task team would be led by Department of Minerals and Energy acting Deputy Director General for hydrocarbons and energy planning Tseliso Maqubela, and would include representatives from the Department of Public Enterprises and Eskom. DPE Director General Portia Molefe said the task team effort should take about one year. The two preferred candidates for the cancelled tender, Westinghouse and Areva, have announced their continued commitment to South Africa and its nuclear potential. Westinghouse Regional Vice President Rita Bowser said, "We believe that the AP1000 is ideal for South Africa as it combines proven power generation systems and components with advanced, passive safety systems. We will nevertheless continue our current nuclear business interests in South Africa that include our work at Koeberg and our support for development of the Pebble Bed Modular Reactor." Westinghouse just opened up an office in Cape Town to service Koeberg. (Engineering News, January 16, 2009) -------------- PBMR Nuclear Fuel Breakthrough -------------- ¶9. (U) Nuclear design company Pebble Bed Modular Reactor (PBMR) has successfully manufactured coated fuel particles, which would form the basis of high temperature reactor fuel, containing 9.6% enriched uranium. PBMR manufactured the particles in December and shipped them to the Oak Ridge National Laboratory and the Idaho National Laboratory in the U.S. to undergo irradiation testing. CEO Jaco Kriek noted that this achievement would give PBMR credibility as a participant in the Next Generation Nuclear Plant project. He also noted that the manufacturing of fuel particles was a key driver of the company's partnership in the consortium that includes Westinghouse. The fuel design consists of low-enriched uranium and triple-coated isotropic particles contained in a molded graphite sphere. Kriek said, "We have conducted extensive development work and we are satisfied that the coated particles that were produced for testing will provide proof and assurance that the PBMR will perform to its predicted best-in-the-world safety capabilities in the process heat and electricity markets, as well as cogeneration applications." (Engineering News, January 16, 2009) -------------- Ferrochrome - Decimating Production -------------- ¶10. (U) Demand and prices for ferrochrome have fallen so low that the Xstrata-Merafe chrome venture is producing at only 20% of its capacity - but it has retained its employees who operate its suspended furnaces. The Xstrata-Merafe venture has decimated its output, but is holding onto its operations personnel to enable it to snap back into action when demand increases. Skills shortages are a problem in South Africa, so many companies are trying to avoid laying-off skilled employees during the global commodities slowdown. An analyst asserted that Chinese ferrochrome producers are being supported by state entities and believed that substantial stocks of Qsupported by state entities and believed that substantial stocks of chrome ore may still exist in China. South Africa is the world's leading producer of chromium ferroalloy production, used in stainless steel production, which has been impacted by the global slowdown. The shutdown of chromium and manganese ferroalloy furnaces has provided temporary relief to electricity supply shortfalls in South Africa. (Mining Weekly, January 23, 2009) -------------- National Space Agency Bill Passed into Law -------------- ¶11. (U) President Kgalema Motlanthe of South Africa signed into law the South African National Space Agency Act, which allows for the establishment of a South African National Space Agency (NSA). Minister Mosebudi Mangena of the Department of Science and Technology emphasized the role satellite images play in minerals prospecting, city planning, precision farming, and weather predictions. Mangena noted that South Africa was already spending over R600 million ($60 million) per year on space related operations. South Africa operates two civilian satellites, the SunSat, which was launched in 1999 and is still orbiting, and the Sumbandilasat, which is yet to be launched. Sumbandilasat is tentatively scheduled to launch in March 2009. (The Star, January PRETORIA 00000178 004.2 OF 004 16, 2009)