No Peace at Mines Exacerbates Risk: South Africa Credit

More than a year after South Africa’s worst mining violence since the end of apartheid, platinum mines are still striving to restore peace, a factor driving up the nation’s default risk faster than for emerging-market peers.

Contracts insuring South Africa debt against non-payment for five years have increased 109 basis points to 244 since Aug. 16, 2012, when 34 people died as police opened fire on protesting mineworkers at Lonmin Plc’s Marikana mine. That’s a bigger jump than for any investment-grade country, according to data compiled by Bloomberg. Contracts for Mexico, which has a similar credit rating, climbed 13 basis points, or 0.13 percentage point, to 125 in the same period.

Labor unrest that began last year at Marikana spread across Africa’s largest economy, prompting Fitch Ratings, Standard & Poor’s and Moody’s Investors Service to downgrade South Africa for the first time since white minority rule ended in 1994. Wage disputes continue at platinum and gold mines, while a strike by 30,000 workers shut production at carmakers including General Motors Co., Toyota Motor Corp. and Bayerische Motoren Werke AG.

“Investors are waiting to see how South Africa resolves the labor issues,” Victor Mphaphuli, a portfolio manager at Stanlib Asset Management, which oversees the equivalent of $50 billion, said by phone from Johannesburg yesterday. “It’s something that still sits there, that’s hanging over our market.”

External Shocks

Current account and fiscal deficits, slower economic growth and the lowest interest rates in more than 30 years leave South Africa vulnerable to external shocks, Mphaphuli said. The nation needs average inflows of 16 billion rand ($1.6 billion) a month to finance the shortfall on its current account, according to Standard Bank Group Ltd., Africa’s largest bank.

Foreign investors have sold a net 6.23 billion rand of bonds since May 22, when Federal Reserve Chairman Ben S. Bernanke said the U.S. may reduce monetary stimulus that has helped boost demand for emerging-market assets. Inflows have dropped to 24.8 billion rand this year, compared with 63.1 billion rand a year earlier, according to JSE Ltd., which runs the nation’s stock and bond exchanges.

The economy expanded an annualized 0.9 percent in the first quarter, the slowest pace since a 2009 recession. That’s making it harder for Finance Minister Pravin Gordhan to rein in the fiscal deficit, a concern raised by Moody’s, S&P and Fitch when downgrading South Africa, starting in September.

Budget Gap

The budget gap for the fiscal year that ended in March is estimated at 5.1 percent, according to the National Treasury. The nation posted a current account shortfall of 5.8 percent of gross domestic product in the first quarter, compared with 3.2 percent in Brazil and 1 percent in Mexico.

Auto workers are asking for a 14 percent wage increase, while the National Union of Mineworkers has asked for 60 percent increases for entry-level jobs. The inflation rate probably rose to 6.2 percent in July, above the central bank’s 3 percent to 6 percent range for the first time since April 2012, a report may show tomorrow, according to the median estimate of 20 economists in a Bloomberg survey.

“It remains difficult to see an easy way out without more strike action, output loss, low levels of inward investment and violence,” Peter Attard Montalto, a London-based emerging-markets economist at Nomura International Plc, said in an e-mail on Aug. 15. “It’s hard to say the lessons of a year ago have been learnt.”

Output Contracts

Mining output, which accounts for more than 50 percent of exports, unexpectedly shrank 6.2 percent in June, while manufacturing production slowed to 0.4 percent from 2.2 percent a month earlier, the statistics agency said Aug. 8. Strikes have already shaved 0.3 percent off growth this year, President Jacob Zuma said June 13.

“The backdrop looks poor for emerging markets, but it boils down to the other factors that are specific to South Africa, like the current-account deficit, the budget deficit,” Stanlib’s Mphaphuli said. “South Africa’s twin deficits seem to stand out in comparison with its peers. That would have an impact on the currency and push up the cost of insuring the debt.”

The rand appreciated 0.6 percent to 10.1453 per dollar as of 1:52 p.m. in Johannesburg, paring its decline this year to 16 percent, the most of 24 emerging-market currencies monitored by Bloomberg. Yields on benchmark 10.5 percent bonds due December 2026 dropped six basis points to 8.54 percent after climbing 20 basis points yesterday to 8.60 percent, the highest since January last year.

‘Global Fears’

Inflows into South Africa’s bond market could resume as yields rise and the Fed provides more clarity on monetary stimulus, according to John Cairns, a strategist at FirstRand Ltd.’s Rand Merchant Bank in Johannesburg.

“For South Africa, the rand and all emerging markets the key issue is whether stronger core economies and higher core yields will slow or reverse capital inflows,” Cairns wrote in an Aug. 19 note. “The short-term answer is yes, hence the current bout of weakness. On a multi-month basis the issue is less clear: South Africa has seen inflows resume aggressively each time the global fears die down.”

South African yields may have to rise further to attract foreign investment, Mphaphuli at Stanlib said. South African 10-year bonds offer a real yield of about 1.6 percentage points, based on the 10-year break-even rate, a measure of investor expectations for inflation over the period. That compares with U.S. Treasury yields close to 3 percent.

‘Lost Ground’

The extra yield investors demand to hold South Africa’s dollar debt rather than U.S. Treasuries has climbed 40 basis points in the past month to 280, according to JPMorgan Chase & Co. indexes.

“The whole world wants dollars, and nobody wants South African assets,” Ion de Vleeschauwer, head of dealing at Bidvest Bank Ltd., South Africa’s biggest chain of money changers, said by phone from Johannesburg yesterday. “If we had a stable labor environment you wouldn’t have lost so much ground.”

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