Monday, July 7, 2014

South Africa's increasing economic uncertainty

When looking at risks across some of the larger emerging markets nations, South Africa stands out, with a number of analysts and rating agencies increasingly ringing alarm bells. Here are some key risk factors to consider:

1. The recent labor strikes, particularly in the mining sector, have been devastating to the nation's economy. And more strikes are on the way.
VoA: - A strike by 220,000 engineers and metalworkers has dealt major blow to South Africa's economy.

The labor dispute has been marked by violent clashes between police and striking workers and reports of looting and intimidation by union members.

The strike comes just a week after settlement of a five-month-long strike by platinum workers. The walkout cost three main platinum mining firms $2.25 billion in lost revenue
General Motors South Africa halted operations last week because a strike at the parts supplier paralyzed it production (see story). Unions are becoming increasingly militant, with communist-based rhetoric often sounding like what we had heard in Zimbabwe. "Wealth redistribution" language is catching on.

2. The nation's debt levels - both private and public - are rising faster than it peers. With weak currency, this problem is expected to only worsen in the nearterm.

Source: Fitch Ratings

3. Simultaneously banks are tightening credit in fear of rising defaults, as the consumer comes under pressure.

Source: Barclays Capital

4. The consumer situation has not been helped by rising inflation, which is a direct result of the South Africa's currency depreciating over 30% during the past two years. Inflation has exacerbated demands for higher wages, leading to some of the labor strikes we see today.

5. The nation's unemployment rate (officially at 25%) has worsened, and some are calling the current labor situation a "ticking bomb".
US News: - The unemployment figures for South Africa's youth are staggering. Officially, youth unemployment (ages 15-34) has gradually risen to 36 percent. Many believe that real unemployment among that population is closer to 50 percent. Only 37 percent of the youth labor force has a high school degree. Of those who failed to get a high school degree, unemployment is at 47 percent, officially. A decade ago, a person with a high school degree had a 50 percent chance of getting a job. Today, that figure is 30 percent. Census estimates are that more than 3.2 million young South Africans between the ages of 15-24 are neither employed or engaged in education or job training. According to South Africa's Labour Force Survey for the last quarter of 2013, two-thirds of all unemployed South Africans were under the age of 35. This is a ticking time bomb in the belly of the nation.
To be sure, South Africa, a nation of incredible beauty and abundant mineral resources, remains a mining powerhouse. Yet after years of underinvestment, its energy infrastructure is increasingly inadequate to support the economy - with constant brownouts/blackouts becoming a part of life. Skilled professionals continue to leave the country in droves, generating a significant "brain drain". And land redistribution programs have brought up concerns over a Zimbabwe-style land reform. Moreover, a recent drive by some populist politicians to nationalise the country's mines raises the risk of declining investment and further economic deterioration.

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