African markets

Analysis: Violence confronts South African markets with reality

South African rand coins are seen in this illustration photo taken October 28, 2020. REUTERS/Mike Hutchings/Illustration

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  • Rand erases all 2021 gains after heavy fall
  • Closures, vaccination delays weigh on economic recovery
  • South Africa’s unemployment rate is one of the highest in the world
  • Possible Fed cut, Chinese demand weighs on metal prices

LONDON, July 14 (Reuters) – South Africa’s worst unrest in years threatens to derail one of this year’s best-performing emerging markets and highlights chronic unemployment and poverty masked by an export boom short term.

The rand fell 3.4% this month and hit a more than three-month low, shares of property companies and retailers fell 7% in a single day and sovereign bonds sold off after the death of more than 70 people in unrest. and the looting that broke out after the imprisonment of ex-president Jacob Zuma.

The price moves are a sharp reversal for a market that had until recently outperformed peers in emerging markets such as Brazil, Mexico and Russia. The recovery was supported by exports which rebounded at the fastest pace in the world thanks to soaring metal prices.

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

However, behind it all were 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 inequality are widespread 27 years after the end of apartheid.

Those grievances have now turned into protests linked 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 focused on exports, so doesn’t necessarily lift all the boats,” said UBS’s head of emerging markets strategy, Manik Narain.

Africa’s most industrialized economy was on pace to grow more than 4% in 2021 after recovering from a recession that began even before it recorded 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 is a particularly unfortunate time,” said Viktor Szabo, portfolio manager at fund manager abrdn. “This will dampen economic activity through temporary closures of businesses and infrastructure, just as the economy was recovering from the COVID shock.”

For the markets, the rand has been the lightning rod. After being the best performing emerging market currency during the pandemic in late April, it has lost some 8% since hitting a more than two-year high in early June.

This week, it has given up all of its gains 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 currency and local government bonds.

On the ground, one of the immediate consequences has been the temporary closure of a number of vaccination centres, further slowing the pace of vaccinations, which, at 2% of a population of 60 million, is among the lowest, even among emerging markets.

South Africa’s setback comes as the global backdrop becomes more challenging.

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, withdraw measures. revival 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 thanks to metals like platinum and rhodium,” Narain said. ‘UBS. “It’s at very mature levels already and we think South Africa is past the peak of exports.”

There is a chance Zuma’s arrest will prove positive if it delivers 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 outcomes now provide President Ramaphosa with a clear path to accelerate state reform,” TS Lombard’s Larry Brainard told clients. “But the wheels of justice will still take time to work.”

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

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