Cablegate: South Africa Economic News Weekly Newsletter June 13, 2008

DE RUEHSA #1414/01 1820538
R 300538Z JUN 08




E.O. 12958: N/A

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1. (U) Summary. This is Volume 8, issue 26 of U.S. Embassy
Pretoria's South Africa Economic News Weekly Newsletter.

Topics of this week's newsletter are:
- Inflation Rises to 10.9%
- SARB Governor Hints at a Further Rate Hike
- Current Account Gap Widens
- SA's Credit Ratings in Spotlight
- Retail Confidence Levels Improve
- Dubai Hopes to Attract More SA Investors
- France to Use SA as a Platform to Increase
Trade in Anglophone Africa
- SAG Silence Puts Eskom Ratings in Jeopardy
- SAG to Promote Nuclear Power Generation
- SA Companies to Increase Submission of Greenhouse
Gas Emissions Data
- Tata Set to Increase Share in Neotel
- Dubai-based Telecom Group Hopes to
Negotiate New Offer for Telkom
- Australia and SA Discontinue Collaboration
in Radio Astronomy
- Weak Rand Makes SA Ideal Spot for Tourists

- Tourism to Reap Benefit of Open Skies
End Summary.

Inflation Rises to 10.9%

2. (U) Statistics SA (StatsSA) reported that CPIX inflation reached
a 51/2-year peak when it increased from 10.4% y/y in April to 10.9%
y/y in May. The rise was driven once again by the soaring costs of
food and fuel. Food prices delivered the worst shock, about 17%
higher than in May 2007 and accounted for nearly half the overall
increase in CPIX. That is bad news for low-income earners, who
spend half their income on food. Food inflation for the
lowest-income earners jumped 18.5% y/y, well above a 16.3% y/y rise
for the top-income group. Transport prices were the next big
offender, rising 16.7% y/y after a 6.2% fuel price rise in May.
Fuel prices increased by another 5.2% in June and further hikes are
in store for July as global oil prices continue to scale new peaks.
The rand firmed 1.3% to R7.88 against the dollar after the CPIX data
was released, which traders said sealed the case for another
interest rate hike in August. Higher interest rates boost the
rand's "carry trade" yield appeal. Analysts said CPIX inflation
will climb beyond the 12% peak predicted by the Reserve Bank earlier
this month, which makes the return of CPIX to within the target band
in 2010 unlikely and further monetary policy adjustment definite.
Most analysts expect another 50-basis-points interest rate hike in
August. Most emerging market countries that target inflation have
failed to meet their goals this year. A rising number, including
Brazil, India, and Turkey, have raised rates. (Business Day, June
26, 2008)

SARB Governor Hints at a Further Rate Hike

3. (U) SARB Governor Tito Mboweni remained hawkish on the interest
rate outlook. Mboweni noted that rising food and fuel costs were
contributing to inflationary pressures. He also stated that
inflation is more broad-based, as rising interest rates and taxes
and increases in the cost of education and health care costs are
also adding to the problem. He reiterated the SARB's concerns over
rising inflation expectations, stating that "Inflation expectations
have gone up and these feed into the demand for higher wages".
Mboweni criticised the 27.5% electricity tariff increase awarded to
QMboweni criticised the 27.5% electricity tariff increase awarded to
Eskom this year and stressed that the SARB remains committed to the
inflation-targeting framework despite criticism from various sectors
of society. Mboweni said that the tighter monetary policy
environment seems to be having the desired effect, but warned that
more rate hikes could be on the cards and that "it would be
painful". Mboweni's speech builds on the SARB's hawkish rhetoric of
the past few months, and the overall message suggests that interest
rates are likely to rise further. This is in line with the views of
most economists who predict a further 50-basis-point interest rate
hike at the August 13-14 Monetary Policy Committee meeting. (Beeld,
June 23, 2008)

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Current Account Gap Widens

4. (U) The SA Reserve Bank (SARB) announced that the deficit on the
current account widened to a record R194.6 billion ($25 billion) or
9% of gross domestic product (GDP) in the first quarter of 2008.
The current account was negatively affected by soaring oil imports
and increased dividend payments on local assets held by foreigners.
Foreign investment in stocks and bonds, which have provided most of
the finance for the deficit in the past few years, swung into
negative territory for the first time since 2005, with an outflow of
R19.4 billion ($2.5 billion). Analysts warned that if international
investors have any doubts about SA being able to finance the current
account deficit, it could put pressure on the currency and interest
rates. The rand has weakened by nearly 17% against a trade-weighted
basket of currencies so far this year in a trend that stokes
inflation by making imports more expensive. Further depreciation
could prompt more hikes in interest rates, which have already
climbed five percentage points in the past two years, curbing
economic growth. The SARB's June quarterly bulletin noted that a
surge in foreign direct investment to R40.6 billion ($5.2 billion),
mainly due to the purchase of a 20% stake in Standard Bank by a
Chinese bank, helped cover the shortfall in the first quarter of
2008. The current account deficit was also funded by a large
increase in foreign deposits with SA banks, which may stem from the
yield appeal of SA's higher interest rates. But this sort of inflow
is known as "hot money" due to its volatile and short-term nature.
Analysts predict that the current account deficit for the whole of
2008 could amount to 9% of GDP, up from 7.3% in 2007 and its highest
level since 1951, when it reached to 10.1%. (Business Day, June 20,

SA's Credit Ratings in Spotlight

5. (U) Reuters reported that Moody's positive credit rating for SA
may also be under pressure following news that Fitch downgraded the
outlook on SA's sovereign rating from Positive to Stable. Moody's
reportedly said that SA's credit rating is dependent on the SAG
maintaining current economic policies and curbing xenophobic
violence. A substantial widening of the current account deficit,
inflationary pressures, and slower economic growth are all adding to
a gloomier outlook. Moody's report highlights the attention SA will
receive after the 2009 general elections, with speculation that the
new administration might review inflation targeting and adopt a more
expansionary fiscal policy. However, African National Congress
(ANC) President Jacob Zuma announced that there would be no major
policy shifts when the new administration takes over next year.
Zuma said that the ANC's economic policies are already in existence
as they were adopted at the 52nd national ANC Conference in
Polokwane in December 2007. (Beeld, June 20, 2008)

Retail Confidence Levels Improve

6. (U) The Bureau for Economic Research's (BER) retail confidence
Q6. (U) The Bureau for Economic Research's (BER) retail confidence
index recovered to 56 index points in the second quarter of 2008
after falling to a five-year low of 52 index points in the first
quarter. The majority of respondents remain satisfied with
prevailing business conditions. The improvement in the second
quarter sentiment, which is not reflected in retail activity, may be
related to an improvement in the electricity supply situation during
the quarter, compared with the situation in the first quarter.
However, respondents also indicated that they expect business
conditions to deteriorate in third quarter of 2008. (ABSA
Newsletter, June 23, 2008)

Dubai Hopes to Attract More SA Investors
7. (U) Dubai Airport Free Zone (DAFZ) Marketing Director Ibrahim
Ahli announced that Dubai was seeking additional SA investment at an
event organized to educate SA entrepreneurs about investment
opportunities in the booming city. SA investment in Dubai has risen
by 130% since 1999. Ahli noted that petrochemicals giant Sasol had

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already established an office in Dubai. Department of Tourism and
Commerce Southern Africa Marketing Director Antoinette Lintvelt
Lloyd listed other SA companies that have established a presence in
Dubai. The list includes SA restaurant chain Nandos, construction
firm Murray & Roberts, defense company Denel, and retailer
Woolworths. The main business opportunities for SA companies were
in the healthcare, media and technology, and education and training
sectors, amongst others, Lintvelt Lloyd said. Tourism, trade,
transport, construction and financing also offered opportunities,
she said. Llyod noted that almost 100,000 South Africans visited
Dubai in 2007, up from about 4,000 in 2006. Johannesburg Chamber of
Commerce and Industry representative Keith Brebnor said that SA had
some catching up to do to take advantage of business opportunities
in Dubai. (Engineering News, June 24, 2008)

France to Use SA as a Platform to Increase
Trade in Anglophone Africa

8. (U) Embassy of France Economic and Commercial Counselor Yves de
Ricaud said France is looking to increase its presence in
English-speaking countries and will use SA as a platform to do this.
De Ricaud was speaking at a French Chamber of Commerce and Industry
breakfast meeting in Johannesburg. He indicated that in Southern
Africa, France was mainly exporting to French-speaking countries.
"French exports in countries such as the Seychelles and Madagascar
have a market share of about 10%, which is much more than the world
average market share of about 5%," he noted. Frances export market
share in SA was about 4%. "One way to increase France's market
share in other regions besides SA is to use the country as a
platform," De Ricaud said. He emphasized that France played an
important part in the SA economy, employing some 30,000 people in
170 subsidiaries. (Engineering News, June 25, 2008)

SAG Silence Puts Eskom Ratings in Jeopardy

9. (U) The three major international rating agencies - Moody's,
Standard & Poor's, and Fitch - are now looking to the SAG for
signals on its contribution to Eskom's capacity expansion program
before they will upgrade Eskom's ratings outlook. According to the
local press, the lack of clarity on the nature and extent of the
SAG's financial support has rendered the National Energy Regulator
of SA (NERSA) decision to allow an additional 13.3% average increase
in electricity tariffs inadequate to warrant a change in Eskom's
ratings outlook. The three rating agencies were unanimous that,
without an indication of SAG support, their ratings of Eskom would
remain unchanged. Moody's placed Eskom on review for a possible
downgrade earlier this year, while Standard & Poor's and Fitch had
the company on negative watch. Four months after Minister of
Finance Trevor Manuel announced a R60 billion ($7.7 billion) loan to
Eskom, the SAG has failed to announce a loan disbursement strategy.
The Department of Public Enterprises and the Department of Minerals
and Energy issued a joint statement shortly after the NERSA decision
Qand Energy issued a joint statement shortly after the NERSA decision
indicating that there is a SAG team working on determining the
"appropriate" financial injection to strengthen Eskom's balance
sheet. Faced with a $44 billion expansion program, Eskom cannot
afford a slip in its credit ratings as the bulk of the financing
will come from local and international creditors. Fitch plans to
meet Eskom management "to discuss their business plan in light of
the most recent regulatory developments." (The Weekender, June
21-22, 2008)

SAG to Promote Nuclear Power Generation

10. (U) The SAG approved a nuclear energy policy last week that
promotes atomic energy as a primary source for power generation. A
cabinet statement indicated that the "policy will also ensure the
reduction of our over reliance on coal, which contributes to SA
being among the world's highest emitters of greenhouse gases". The
Department of Minerals and Energy has been tasked to flesh out the
practical details of the policy and oversee its implementation. The
adoption of the policy will require the recapitalization of the
national nuclear regulator and the Nuclear Energy Corporation of SA
(NECSA). NECSA's research and development budget will need to be

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bolstered. Three new agencies are proposed under the policy: the
National Nuclear Security Agency (to integrate the existing nuclear
safety responsibilities into a single agency); the National Nuclear
Architectural Capability (to oversee the development of a national
supplier network of nuclear equipment and nuclear reactors); and the
National Radioactive Waste Management Agency (to manage radioactive
waste). NECSA has been designated the lead agency in the
implementation of this policy, while Eskom is the only power company
allowed to build nuclear energy stations. According to the
timelines provided in the policy, SAG hopes to encourage the
establishment of local manufacturing capacity for nuclear equipment
and components by 2015. (Financial Mail, June 20, 2008)

SA Companies to Increase Submission
of Greenhouse Gas Emissions Data

11. (U) Over fifty of SA's companies are expected to disclose
information about their carbon emissions, which will be incorporated
into the world's largest databank of greenhouse gases (GHG) later
this year. The exercise dubbed the Carbon Disclosure Project (CDP)
was launched in 2007, with an initial target of 40 SA companies.
The CDP project entails GHG emissions accounting, management,
reduction and cost accounting. Although 40 companies were targeted
in 2007, only 15 provided quantitative data on emissions. The local
CDP operators Incite Sustainability and the National Business
Institute observed that many companies have started to acknowledge
that the carbon footprint issue affects business. SA firms in the
agriculture sector and wine production are already feeling the
pressure exerted by importers and retailers, who demand to know the
size the exporters' carbon footprint. Incite Sustainability's John
Hanks said the CDP has received 28 companies' responses thus far.
Twenty-one companies requested extensions, while another eight
confirmed their intention to respond. Targeted corporations include
Sasol, BHP Billiton and Anglo-American. (Business Report, June 17,

Tata Set to Increase Share in Neotel

12. (U) Tata Communications announced that it would acquire a
further 30% stake in SA's second fixed-line operator Neotel from
State-owned enterprises Eskom and Transnet. If the acquisition were
to succeed, Tata Communications would hold an effective 56% stake in
Neotel. Nexus, Communitel, and the Two Telecom Consortium are the
other stakeholders in Neotel. Tata Communications is part of the
$29 billion Tata Group of India. (Business Day, June 25, 2008 and
Engineering News, June 24, 2008)

Dubai-based Telecom Group Hopes to
Negotiate New Offer for Telkom

13. (U) Dubai-based Oger Telecom announced intentions to negotiate a
new offer for SA's largest telecom operator Telkom, with the
company's potential local buyers. A consortium led by Mvelaphanda
Holdings reported that it was considering making an offer for
Telkom, if Telkom sold its 50% stake in mobile unit Vodacom. Oger
QTelkom, if Telkom sold its 50% stake in mobile unit Vodacom. Oger
Telecom, which owns SA's mobile operator Cell C, wants to merge Cell
C with Telkom's fixed-line business. "We want to create a model in
SA that is similar to what we have in Turkey between Turk Telekom
and Avea," Oger Telecom CEO Paul Doany told Reuters. Oger has a
controlling 55% stake in Turk Telekom and 81% in Avea, Turkey's
third-largest mobile operator. "We believe fixed/mobile convergence
to be ideally suited to the market in SA and that there is much to
be gained by all stakeholders in that regard," said Doany.
(Engineering News, June 24, 2008)

Australia and SA Discontinue
Collaboration in Radio Astronomy

14. (U) Australia and SA recently agreed to discontinue
collaboration in the development of a radio astronomy software

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program known as the Convergent Radio Astronomy Demonstrator
(Conrad). Australia and SA jointly established Conrad in 2006 to
develop software for the SA Karoo Array Telescope (MeerKat) and the
Australian Square Kilometer Array Pathfinder (ASKA). The software
technology requirements for the two projects had begun to diverge,
seeking different software development approaches and data
processing. The parties also received larger than expected funding,
which will allow them to pursue software development independently.
The two parties will continue to share relevant information despite
the split. Both countries are also the front-runners in the bid to
host the mult-billion-dollar Square Kilometer Array (SKA) radio
telescope, which will be 50 times more sensitive than current
telescopes. ASKA and Meerkat are the precursors to the SKA project.
The Conrad Telescope Operating System was developed by the two
countries. It is currently operating SA's MeerKat prototype dish at
the Haartebeesthoek Radio Astronomy Observatory, west of Pretoria.
(Engineering News, June 20-26, 2008)

Weak Rand Makes SA Ideal Spot for Tourists

15. (U) The Tourism Investment Corporation expected the sector to do
well as a result of the weaker rand, which made SA more attractive
to incoming tourists. CEO Tommy Edmond forecasted that visitors
would still come from overseas despite economic difficulties in the
U.S. and Europe, and the higher cost of long-haul flights. Edmond
said most tourists planned holidays in SA far in advance "and they
expect the cost of a long-haul flight to be high". "The strength of
the Euro against the rand will help to offset this for people from
continental Europe, who will find it far cheaper to be here," noted
Edmond. "Most of our outbound retail travel business is corporate
and this is still holding up well, although leisure travel that has
not already been booked will be affected," he added. (Business
Report, June 20, 2008)

Tourism to Reap Benefit of Open Skies

16. (U) SA Tourism CEO Moeketsi Mosola said SA's decision to open
its skies to increased competition from foreign airlines in the
run-up to 2010 is finally beginning to pay dividends. The recently
concluded UK-SA agreement on air transport, which will add 28 new
flights a week between the two countries over the next three years,
was evidence of this. SA Tourism and other sector leaders have long
called for more flights to SA to meet burgeoning demand but the SAG
has been slow to respond. "I have been involved in these
discussions for the past seven years as CEO of SA Tourism and it is
the first time that I am completely satisfied with the agreement.
There is no longer this eye-for-an-eye approach to talks and this
agreement offers the airlines much more flexibility in how the
frequencies (flights) are used," Mosola said. Under the agreement,
airlines in both the UK and SA have been given 14 additional flights
between the two countries this year, seven in 2009, and a further
seven between London and Durban in 2010. British Airways was first
Qseven between London and Durban in 2010. British Airways was first
to take up the flight, adding a third daily flight between London's
Heathrow and Johannesburg from April 2009. Virgin and South African
Airways are still weighing their options. Among the changes
provided in this agreement is a clause allowing UK airlines to take
up SA flights if SA airlines do not take up their frequencies within
a specified time. "That has never been the case in the past," said
Mosola. The airlines will now have more choice about which aircraft
they use, which airports they use and when they will fly. The press
reported that SAG has become more sophisticated and clever in its
negotiations. It is not strictly adhering to the principle of
reciprocity but looking at what is needed for the country,
particularly the tourism sector, to grow. The SAG first outlined a
more liberalized approach to bilateral negotiations in a 2006
cabinet-approved airlift strategy document. The document presents a
five-year plan for the regulation of air transport in support of the
tourism sector with the express aim of ensuring that airline
capacity is created ahead of demand. The Department of Transport
(DOT) said discussions regarding added capacity were taking place
with other governments. DOT has negotiated with Qatar, the United
Arab Emirates (UAE), the UK, South Korea, Gambia, and New Zealand
and is currently in negotiations with Australia. Further
discussions are planned with the Netherlands in the next two months.
SA is also in discussion with India on further liberalizing the

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existing bilateral agreement, DOT officials said. Talks with the
UAE in December 2007 resulted in Emirates adding daily flights
between Dubai and Cape Town in March 2008. (Business Day, June 23,


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