Why South Africa may be the worst bet in emerging markets

Striking farm workers and police face off in De Doorns, in South Africa’s Western Cape province.
Striking farm workers and police face off in De Doorns, in South Africa’s Western Cape province.
Image: AP Photo / Schalk van Zuydam
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The wave of violent miner strikes that hit South Africa last year continues to cripple production in Africa’s largest economy, as global investors weigh whether the nation should remain a destination for their money. In October, South Africa received its first downgrade from a credit rating firm in nearly two decades and the hits keep coming. S&P cut South Africa’s rating in October.  And on Jan. 10, credit-rating firm Fitch dropped the axe. Fitch wrote:

Economic growth performance and prospects have deteriorated, affecting the public finances and exacerbating social and political tensions. In the five years to 2012, GDP growth averaged 2.2% in South Africa (1.3% in per capita terms), compared with 4.7% for emerging markets as a whole. Weak growth reflects structural rigidities, declining competitiveness, policy uncertainty and labour unrest.

J.P. Morgan offers this chart which shows how the mining strike—which has spread into other sectors such as agriculture—has thrown off South Africa’s trade balance. Precious and semi-precious metals make up about 20% of South Africa’s exports, according to Barclays.

South Africa trade balance

The situation isn’t yet critical. South Africa benefits from a deep local bond market. About 91% of its own debt is denominated in its own currency, the rand, according to Fitch. And the average maturity of its debt load is quite long, 9.2 years, which means it has time to get growth back on track and ensure it has the cash to pay creditors. But the pain in South Africa exports is probably not over. J.P. Morgan analysts note that it takes between five to eight weeks for metals to be mined and then soldmining and sales of metals—it’s especially long for platinum, something #minthecoin trollers might be interested in—which means that it’s possible that further declines in South African exports could still be in the pipeline.