SOUTH AFRICQECONOMIC NEWS WEEKLY NEWSLETTER OCTOBER 26,

UNCLAS SECTION 01 OF 03 PRETORIA 003779 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 AFRICQECONOMIC NEWS WEEKLY NEWSLETTER OCTOBER 26, 2007 ISSUE PRETORIA 00003779 001.2 OF 003 ¶1. (U) Summary. This is Volume 7, issue 43 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - Inflation At Four-Year High - Debt Service Cost To Income More Than 10% - Earthlife Africa Challenges Nuclear Thrust - Mbeki's Re-Election Bid Worries Investors - Broad-Band May Not Stay In State Hands - Legislation Delaying SA Oil Projects - Nedbank On Greening Crusade End Summary. -------------- Inflation At Four-Year High -------------- ¶2. (U) According to Statistics South Africa (StatsSA), CPIX-inflation (CPI less mortgage interest) increased to a four-year high of 6.7% in September 2007, breaching the South African Reserve Bank's (SARB's) 3-6% target band for the sixth month in a row. CPIX-inflation accelerated from 6.3% in August and outpaced analyst's September forecasts of 6.4%. Analysts said the data showed inflation pressures were entrenched. "It reinforces that we have an inflation problem and that 7.0% is likely before the end of the year," said Jeff Gable, ABSA Capital's Head of Research. "It's going to continue to leave the focus on the SARB, whether or not it's time to call an end to interest rates hikes or not.", he said. The SARB expects inflation to peak in February 2008 and then gradually come back to the bank's 3-6% target band. Bonds fell after the data was released, with yields on the 2015 issue spiking as much as 15-basis points, before retreating. The SARB has raised its key repo rate, at which it lends to commercial banks, cumulatively by 350-basis points since June last year. The unexpectedly high inflation figure for September increases the pressure for the SARB to raise its repo rate once again when its Monetary Policy Committee meets in early December, just a week ahead of the ANC leadership election. (Business Day, October 24, 2007) -------------- Debt Service Cost To Income More Than 10% -------------- ¶3. (U) According to the Bureau for Economic Research (BER),rising interest rates and inflation have pushed debt service costs as a 
share of consumer's disposable income above 10% for the first time in eight years. The service cost ratio measures the toll taken on households by interest payments on mortgage and credit card debt. Analysts said the ratio is set to creep higher in the next few months as the effect of the past two interest rate hikes filters through, putting more pressure on household finances. The SARB has highlighted that household debt as a share of disposable income reached a record peak of 76.5% in the second quarter of 2007. (Business Day, October 23, 2007) -------------- Earthlife Africa Challenges Nuclear Thrust -------------- ¶4. (U) Anti-nuclear environmental group Earthlife Africa called for the South African draft nuclear policy to be withdrawn in its formal comment submission at the end of the public comment period. According to Earthlife Africa, "The draft nuclear policy is a hasty and ill-informed document replete with sweeping unsupported Qand ill-informed document replete with sweeping unsupported statements as to the appropriateness of nuclear power." The South African Department of Minerals and Energy (DME) will soon begin to study the 400 pages of comments from various organizations on the draft policy. DME Chief Director for Nuclear Tseliso Maqubela said, "These comments may result in the draft policy being revised. Inputs could not change policy, but could change the emphasis." Earthlife Africa has objected that the policy did not follow DME's own procedures as determined by the white paper on energy policy of 1998, wherein a decision on new nuclear capacity would depend on the environmental and economic merits of alternative energy sources, relative to nuclear and the political and public acceptance of nuclear power. Maqubela said the DME was finalizing an electricity master plan, as well as a new national integrated resource plan. PRETORIA 00003779 002.2 OF 003 Eskom is moving forward on nuclear expansion plans, putting in motion environmental impact assessments (EIA) at five coastal sites. If all approvals are secured, Eskom aims to start construction in 2010, targeting first unit operating in 2016 or 2017. (Business Report, October 24, 2007) -------------- Mbeki's Re-Election Bid Worries Investors -------------- ¶5. (U) According US rating agency Moody's, President Thabo Mbeki's determination to make himself available for a third term as African National Congress (ANC) leader worries international investors. Moody's Vice-President Kristin Lindow said investors interpret it as a reluctance to relinquish political power and when there are signs that any emerging market head of state wants to retain his powers, there tend to be question marks about what that could lead to. Lindow said international investors would prefer to see a new ANC head elected at the ruling party's national conference in Polokwane in December. According to Moody's, Mbeki's insistence to make himself available for a third ANC term is seen as an attempt to halt ANC Deputy President Jacob Zuma's march to power. Lindow said investors would be worried if Zuma was elected leader of the country because of perceptions he would pursue more populist economic policies, but those concerns could be unjustified. According to the local press, Zuma told clients of a top international bank in Johannesburg recently that the ANC would stay committed to a mixed economy, with the private sector driving growth, but with an important role for the state. South Africa's biggest business grouping, Business Unity SA (Busa),said it was worried that the country's credit rating, which influences foreign investment inflows, could suffer from a change in leadership. Moody's revised its outlook upward on South Africa's Baa1 mid-investment grade rating for foreign currency debt from "stable" to "positive" in June. Fitch ratings agency also upgraded their South African rating outlook to positive earlier this year. However, Fitch warned that uncertainty over the continuity of the South Africa's successful economic policies could influence a future rating. (Business Day, October 24, 2007) -------------- Broad-Band May Not Stay In State Hands -------------- ¶6. (U) South Africa's planned state-owned broadband infrastructure company would not necessarily remain in state hands after it achieved its strategic objectives, Public Enterprises Minister Alec Erwin said. Erwin said that Broadband Infraco was established to provide accessible and affordable broadband infrastructure. The minister justified the state's investment by the fact that there were a few incumbents in the telecommunications industry with "significant market power", referring to the state telecom monopoly firm Telkom. Erwin was correct in noting that the lack of broadband capacity and the related high cost is an obstacle to economic growth. (Business Day, October 18, 2007) -------------- Legislation Delaying SA Oil Projects -------------- Q -------------- 7 (U) According to the Petroleum Agency, new laws, which took effect in May, have delayed fresh investment in deep-water oil exploration. According to the new law, companies holding mineral rights, including oil and gas, have to convert existing rights in order to conform to the new code. The conversion process has been fraught with problems, delaying new investment in exploration. The thrust of the new Minerals and Petroleum Resources Development Act is to separate the ownership of the mineral rights from ownership of the surface and to drive the active use of rights. Among those affected by the conversion process are BHP, South African state owned oil firm PetroSA, U.S.-based Forest Exploration, Canadian Natural Resources and U.S.-based Pioneer Natural Resources, the five big players exploring for oil and gas in South Africa. According to the Petroleum Agency, the conversion process has impeded expensive offshore exploration but increased access to onshore rights has stimulated the market, with about ten companies looking for gas and coal bed methane. (Business Day, October 18, 2007) -------------- PRETORIA 00003779 003.2 OF 003 Nedbank On Greening Crusade -------------- 8 (U) Nedbank, one of South Africa's four largest banks, is on a greening crusade to promote environmental sustainability. Nedbank Chief Financial Officer (CFO) Mike Brown said their corporate colors are green to reflect their hold on the "green space" in the financial services sector. Nedbank not only offers products which are environment-oriented but also look into the operating environment at issues such as energy utilization and their carbon footprint. Nedbank offers a credit card where users could make a contribution to an environmental cause and sponsors the Green Mining Award to encourage mines to engage into environmental sustainability programs. Nedbank is the only bank in South Africa which has signed the Equator Principle, which involves implementing sustainable projects. Brown noted that Nedbank would in the near future focus on climate change and adaptation activities. (Business Report, October 12, 2007) TEITLEBAUM