Cablegate: South Africa Economic News Weekly Newsletter August 15,

Published: Mon 18 Aug 2008 06:06 AM
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2008 ISSUE
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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
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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,
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
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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
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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)
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