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Cablegate: South Africa Economic News Weekly Newsletter

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TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
PGOV, SF
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER
NOVEMBER 30, 2007 ISSUE


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1. (U) Summary. This is Volume 7, Issue 48 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:

- GDP Growth Accelerates
- Inflation Tops 7 Percent
- Business Confidence at 4-Year Low
- Credit Growth Keeps Pressure on Rates
- US Company First to Use Incentive Program
- US is SA's Number One Market
- Telkom Ends Disposal Talks With MTN, Vodafone
- NECSA Moots Second Reactor at Pelindaba

End Summary

----------------------
GDP Growth Accelerates
----------------------

2. (U) According to figures released by Statistics South Africa
(StatsSA), gross domestic product (GDP) growth accelerated from 4.4
percent in the second quarter to 4.7 percent in the third quarter of
2007, demonstrating that the economy has so far been resilient to
tighter monetary policy. "We believe the GDP data remove the last
credible argument for the South African Reserve Bank (SARB) to leave
interest rates on hold next week," Absa Capital said in a research
note. The financial services industry grew by 12.1 percent in the
third quarter of 2007 as tighter credit had only a muted effect on
consumer demand. The construction sector grew by 14.7 percent in
the third quarter, fueled by the government's R482 billion ($70
billion) infrastructure spending drive. Growth in retail sales, the
third-biggest sector, slowed from 4.7 percent in the second quarter
to 4.5 percent in the third quarter. Manufacturing output
contracted 2.5 percent in the third quarter, putting it into a
recession and clouding official plans to boost exports. According
to the Bureau of Economic Research (BER), growth was expected to
remain brisk at 5 percent this year, but would slow to "a little
above 4 percent" next year. This need not be viewed as a bad
outcome, given that growth rates of more than 5 percent were helping
to fan inflation and widen South Africa's current account deficit.
(Business Day, November 28, 2007)

------------------------
Inflation Tops 7 Percent
------------------------

3. (U) According to StatsSA, inflation rose from an annual rate of
6.7 percent in September to 7.3 percent in October 2007, scaling a
four-and-half-year peak. Food and fuel were again the main drivers
of the acceleration in the CPIX-inflation rate, putting it in breach
of its 3 percent-6 percent target for the seventh month running.
StatsSA data also suggested that inflation would peak above 8
percent early next year, higher than previous forecasts and paving
the way for an interest rate hike at the SARB Monetary Policy
Committee meeting next week with possibly more hikes next year.
Economists also observed that the unexpected pick-up in growth
during the third quarter of 2007 should give the SARB ample scope to
raise interest rates again. The SARB has raised its repo rate 3.5
percentage points to 10.5 percent since June 2006. (Business Day,
November 30, 2007)

---------------------------------
Business Confidence at 4-Year Low
---------------------------------

4. (U) The Bureau for Economic Research (BER) business confidence
index decreased from 72 points in the third quarter of 2007 to 67
Qindex decreased from 72 points in the third quarter of 2007 to 67
points in the fourth quarter of 2007, the fifth consecutive fall and
its lowest level since the final quarter of 2003. The BER business
confidence index peaked at 88 points in the fourth quarter of 2004
but has been steadily falling since interest rates began to rise in
the middle of 2006. Sentiment in the retail sector was hardest hit,
plunging by 13 points as sales volumes fell and price margins
narrowed. According to the BER, price margins have come under
pressure as businesses find it difficult to fully pass on higher
costs stemming primarily from higher commodity prices. Economists
said the sustained decline in business confidence indicated that the
surprise pickup in economic growth during the third quarter of this

PRETORIA 00004092 002.2 OF 003


year was unlikely to last. (Business Day, November 29, 2007)

-------------------------------------
Credit Growth Keeps Pressure on Rates
-------------------------------------

5. (U) South African Reserve Bank (SARB) data showed that growth in
demand for credit from the private sector eased marginally from
22.46 percent in September to 22.27 percent in October 2007, while
annualized M3 money supply was down from 24.94 percent to 23.39
percent during the same period. However, analysts said the slowdown
was not pronounced enough to placate the SARB's concerns over rising
inflation and stubbornly high consumer spending. "These numbers are
huge despite a slowdown," said Citadel economist Salomi Odendaal.
Credit growth has remained robust despite the higher rates and a new
credit law, introduced in June, which clamps down on reckless
lending. (Business Day, November 29, 2007)

-----------------------------------------
US Company First to Use Incentive Program
-----------------------------------------

6. (U) TeleTech, a US business outsourcing company, is the first
investor to utilize the South Africa Department of Trade and
Industry's (DTI) incentive program. DTI launched its five-year, R1
billion ($150 million) incentive scheme to attract outsourcing
investors in March 2007. DTI Chief Director of Strategy
Competitiveness Raymond Ngcobo said TeleTech was one of seven
companies identified under the program. A multimillion-rand
building is being built in Cape Town for TeleTech's operations, and
TeleTech is expected to receive financial grants of R37,000 to
R60,000 ($5,280 to $8,570) for each of its expected 1,300 call
center seats. Each call center seat can generate up to three jobs.
According to Teletech General Manager Craig Reines, Teletech was
attracted by South Africa's "excellent infrastructure, growing
talented labor pool and its positioning as the gateway to the rest
of the continent." (Business Report, November 27, 2007)

----------------------------
US is SA's Number One Market
----------------------------

7. (U) According to Department of Trade and Industry statistics,
South Africa exported more goods to the U.S. in 2007 up to August
than any other country, including South Africa's traditionally
largest trade partner Japan. The US surpassed Japan by a slight
margin with R34 billion ($466 million) in exports from South Africa
compared to Japan's R33.8 billion ($483 million). South Africa's
exports to the U.S. are 22 percent higher this year than in the same
period last year. Platinum group metals and coal are Japan's
biggest imports from South Africa, while the U.S.' major imports
include mining products, vehicle parts and machinery. (The Times,
November 26, 2007)

---------------------------------------------
Telkom Ends Disposal Talks With MTN, Vodafone
---------------------------------------------

8. (U) Telkom, South Africa's former telecoms monopoly, called off
break-up talks with mobile phone rival MTN and partner Vodafone on
November 28, sending its shares plunging over 10 percent. Telkom
said talks to sell part of its mobile phone assets to British-based
Vodafone had hinged on a successful deal to sell all or some of its
QVodafone had hinged on a successful deal to sell all or some of its
fixed-line assets to mobile phone operator MTN. Department of
Communications Director General Lyndall Shope-Mafole said the South
African Government, which owns 38 percent of Telkom and had backed
the talks with MTN and Vodafone, remained confident in Telkom's
board. Telkom said it would continue to pursue its options to offer
converged services, such as combined fixed and mobile voice and data
services. An industry analyst said that MTN was interested in
Telkom's national back-bone, but Telkom probably wanted to foist
much more onto MTN, including 30,000 staff. (Business Day and
Engineering News, November 29, 2007)

---------------------------------------
NECSA Moots Second Reactor at Pelindaba
---------------------------------------

9. (U) The Nuclear Energy Corporation of South Africa (NECSA) has

PRETORIA 00004092 003.2 OF 003


been identified by the government as the lead agency to develop the
nuclear industry, including R&D and development of nuclear fuel and
enrichment facilities. As a first step in the process, NECSA CEO
Rob Adam said NECSA is considering building a second nuclear reactor
at its Pelindaba research reactor site near Hartbeespoort dam in the
North West, not far from Pretoria. This would be a companion to the
Safari 1 reactor, which was built in the 1960's and is the country's
oldest reactor. Safari 1 has propelled NECSA into being the world's
third largest producer of medical isotopes, including molybdenum 99
nuclear isotopes. NECSA is developing processes aiming to shift its
reliance on highly enriched uranium (95 per cent or weapons grade)
to lesser enriched uranium (about 5 per cent or the level required
to run nuclear power stations) to produce medical isotopes. NECSA
is considering building a second reactor to expand its commercial
isotope production. The article ended by noting "sensitivities
illustrated by the attempted theft of a 'crucial' PC on a daring
night raid on Pelindaba, thwarted but resulting in the suspension of
six security officials. Adams says he has no idea about the motives
for the break-in, under investigation." (Financial Mail, November
23, 2007)

BOST

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