Recent violence at a platinum mine in South Africa, which
resulted in 34 deaths and scores of injuries, left the country in
shock and the investors spooked. The incident actually hits at
larger socioeconomic problems that the country faces and the risks
as well as the uncertainties that lie ahead for the investors.
Labor unrest is nothing unusual in the country. The mine in
question is owned by Lonmin Plc, the third largest platinum
producer in the world. The operations at this mine as well as
others have been
suspended many times in recent past
. In May last year, the company had sacked 9,000 workers
after a strike. Earlier this year, violence at Impala Platinum
Holdings led to four deaths and six-week closure. (Read:
Malaysia ETF: the Perfect Emerging Market Fund?
Economists warn that the damage to the mining industry, which
accounts for 60% of the country's exports, would
hurt economic output and impact growth
. Country's economic growth is already constrained by recession in
Euro-zone (destination for ~29% of the country's exports) and
slowdown in China (~ 14% of the exports). (Read:
Forget the BRIC ETFs, Focus on the PICKs
Since its transition from Apartheid in 1994, the largest economy
in Africa has grown at an average rate of 3.3% while the inflation
has remained modest within 3% to 6% range. The country has a
well-developed financial system and modern infrastructure. It is
one of only four African countries that have been classified as
upper-middle income countries by the World Bank.
South Africa has been endowed with vast natural resources. The
country is the largest supplier of platinum (~67% of total supply)
in the world and also one of the top producers of gold, diamonds
and palladium. (Read:
Five Top Performing Single Country ETFs of 2012
The economy grew at 3.1% in 2011, but is expected to slow down
to just 2.6% in 2012 and then grow at 3.3% in 2013 (per IMF
estimates). The growth rates are much lower compared with the
broader sub-Saharan Africa which is expected to grow at 5.4% and
5.3% respectively in 2012 and 2013.
The country is among the worst in the world in terms of income
inequality, which is further exacerbated by low employment growth
in the country. Savings and investment rates also remain low. Last
month, the central bank cut the key rate (for the first time since
2010) by 50 basis points to 5% , to boost growth.
The unemployment rate is close to 25% currently; in fact it has
remained above 20% for the past 15 years. About 70% of the
country's youth are unemployed and about 86% of the country's
unemployed are black. For approximately a third of the South
Africans, government grants are the only regular income. Per
central bank's estimates, a growth rate above 7% is needed to make
any significant dent in the unemployment rate.
All three major rating companies have lowered their outlook for
South Africa's debt to negative from stable in the past six months
due to growing unemployment, income inequality and policy
Brazil ETFs: More Trouble On the Horizon?
Despite significant reforms in past 10-15 years, the government
still had wide control over the nation's economic activity.
Further, market liberalization measures now seem to be on the back
burner as the government struggles to deal with issues like high
spending and corruption.
Compared to the size of the economy and external trade, the
level of foreign exchange reserves is low (~$48 billion),
contributing to increased volatility of the currency, which remains
vulnerable to commodity prices and global risk perception.
As a fall-out of the violence, platinum prices went up by about
5% in the last two trading days though the gains may be limited due
supply surplus and the lack of significant
. The precious metal has gained only about 4% year-to-date.
On Friday, the Rand fell by 1.3% against the US Dollar and
MSCI South Africa Index Fund (
went down by about 2.7%.
We think that the upside for
MSCI South Africa Index Fund (
will be limited in the near-to-medium term, given high risk and
policy uncertainty in the country. As such the investors may
like to underweight or avoid the ETF for the time being.
Want the latest recommendations from Zacks Investment
Research? Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
ISHARS-S AFRICA (EZA): ETF Research Reports
ETFS-PLATINUM (PPLT): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for the
Next 30 Days. Click to get this free report