Analysis: Violence gives South African markets control over reality

The South African Rand coins can be seen in this illustrative photo taken on October 28, 2020. REUTERS / Mike Hutchings / Illustration

  • Rand wipes out all 2021 gains after heavy fall
  • Closures, vaccination delays to weigh on the economic recovery
  • Unemployment in South Africa, one of the highest in the world
  • Possible reduction by the Fed, Chinese demand weakens on metal prices

LONDON, July 14 (Reuters) – South Africa’s worst turmoil in years threatens to derail one of this year’s major emerging market players, highlighting hidden chronic unemployment and poverty by a short-term export boom.

The rand fell 3.4% this month and hit a more than three-month low, shares of real estate companies and retailers fell as much as 7% in a single day, and sovereign bonds were sold after more than 70 people were killed in the unrest and looting that erupted following the imprisonment of former President Jacob Zuma.

The price movements are a sharp reversal for a market that until recently outperformed its peers in emerging markets such as Brazil, Mexico and Russia. The recovery was supported by the fastest-paced rebound in exports in the world thanks to soaring metal prices.

This export boom turned a long-standing balance of payments deficit into a surplus.

However, behind it all hid the same social pressures that have been felt more acutely since the pandemic.

An unemployment rate above 32% is the highest in the Group of 20 major economies, while poverty and wider inequalities are pervasive 27 years after the end of apartheid.

Those grievances have now turned into protests related to Zuma’s imprisonment for defying a Constitutional Court order to testify in a high-level corruption investigation during his nine years in office until 2018.

“This is an economy that has rebounded faster than many expected six months ago, but for the average person unemployment remains one of the highest in the world and the recovery has subsided. focused on exports, so doesn’t necessarily lift all boats, “said Manik Narain, UBS’s head of emerging markets strategy.

Africa’s most industrialized economy was on track to grow by more than 4% in 2021 after recovering from a recession that began even before registering its first COVID-19 infection last March. This rebound will almost certainly take a hit.

“There is never a good time for riots, but now the time is particularly unfortunate,” said Viktor Szabo, portfolio manager at abrdn fund manager. “It will dampen economic activity through temporary business and infrastructure closures, just as the economy is recovering from the COVID shock.”

For the markets, the rand was the lightning rod. After being the best performing emerging market currency during the pandemic at the end of April, it has lost some 8% since reaching a peak of more than two years in early June.

This week, he gave up all his winnings since the start of the year.

“There is a risk of further losses in the short term if the government fails to control the violence,” said Elisabeth Andreae, analyst at Commerzbank EM.

Wall Street bank Citi has already reduced its exposure to both the currency and local government bonds.

On the ground, one of the immediate consequences was the temporary closure of a number of vaccination centers, which further slowed the pace of vaccinations, which, with 2% of a population of 60 million inhabitants , is among the lowest, even among emerging markets.

South Africa’s setback comes as the global context becomes increasingly difficult.

South Africa is the world’s largest producer of platinum and chromium. But platinum prices have fallen 15% from February’s more than six-year highs, and commodity prices could weaken if Chinese demand slows and more countries, including the United States, pull back measures. relaunch of the pandemic era.

“One of the reasons the rand has been strong is that South Africa has one of the strongest export markets in the world due to metals like platinum and rhodium,” Narain said. ‘UBS. “It’s at already very mature levels and we believe South Africa has passed the peak in exports.”

There is a chance that Zuma’s arrest will prove successful if it deals a decisive blow to South Africa’s chronic corruption problem.

It could also strengthen President Cyril Ramaphosa’s grip on power within the ruling African National Congress. This will be put to the test in the municipal elections in October.

“These legal results now give President Ramaphosa a clear path to accelerate state reform,” TS Lombard’s Larry Brainard told clients. “But the cogs of justice will take a long time to work out.”

Additional reports by Marc Jones; Editing by Emelia Sithole-Matarise

Our standards: Thomson Reuters Trust Principles.

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