South Africa’s Platinum Reputation Rupture

The Johannesburg Exchange fought to stay positive as foreign investors dumped premier mining shares as bloody confrontations and closures spread nationwide from the original Marikana site, with President Zuma warning that the standoff could again portend recession. The precious metals industry accounts for over one-tenth of GDP in direct and indirect contributions, as Q2 statistics showed the economy already missing the 3 percent growth forecast with unemployment frozen at 25 percent. Rating agencies put the sovereign on notice for a downgrade for fiscal and structural reform doubts heading into the next presidential elections, where ANC intraparty splits have played out in a more militant stance by a breakaway mineworker union and continued calls for expropriation by expelled youth-wing leader Malema, who has been accused by the government of tax and money-laundering offenses. The black economic empowerment agenda for the industry, which was subject to a voluntary charter transferring management and ownership control over time, was challenged by the initial violent protest despite the participation of indigenous executives in Lonmin’s team. The rand sold off toward 8.5 to the dollar in the aftermath as the current account deficit could now exceed 6 percent of GDP. To maintain currency confidence the central bank was on hold at its September meeting despite inflation around 5 percent as food prices moderated. Policy drift may last through the December ANC convention as the president and his opponents focus on corralling political support, which may bring ratings demotion offsetting the country’s entry into the Citigroup benchmark world bond index. On the electoral front the ruling party has to worry about internal dissension as well as opinion survey inroads from the rival Democratic Alliance, which has won local office and begun to attract backing beyond the white minority founders. President Zuma has resisted calls for his resignation and intends to hang on through next year as many in the post-apartheid coalition seek a compromise succession candidate.

The IMF also urged that public debt be placed on a path toward 35 percent of GDP over the next five years through “rebalancing spending” as the mining employees were granted a 20 percent wage increase after the events and a new health insurance scheme is launched to cover the population with a high disease and poverty toll. Its Article IV report recommended labor market and savings mobilization changes acquiring urgency with lower export demand from Europe and China. Skill and geographic “mismatches” worsen inequality and consumer choice is limited. The Fund praised diversification across the continent while noting that banks are “heavily exposed” to home mortgage portfolio and liquidity swings. Outward liberalization of capital controls has been cautious in its view as portfolio investors brace for possible further reckless confrontation on inflow treatment.