South Africa’s mining risk increase traced to June 2011


Matthew Turner
Published on:

Political instability and deteriorating labour-market conditions were among factors that played into analysts’ heightened perceptions of South Africa’s risk outlook in Euromoney’s Country Risk survey, before the violence at Marikana and the rating agency downgrades.

CDS spreads on South Africa’s sovereign debt have widened in the weeks since South Africa’s mining strike at Marikana, which left 44 people dead and more than 70 injured, while rating agencies Standard & Poor’s (S&P) and Moody’s have downgraded the country.

However, investors received early warning of the increased risk of industrial action in the country from economists participating inEuromoney’s Country Risk survey.

According to ECR’s labour market/industrial relations indicator, South Africa’s labour market score fell by one point out of a possible 10 between Q2 2011 and Q1 2012. This means the ECR consensus showed deteriorating risk conditions over 12 months before the incident, long before the danger was anticipated by either CDS spreads or the rating agencies.

                                       source: Euromoney Country Risk

As a result, South Africa now has the worst score in the labour market indicator of any of the Brics economies.

CDS spreads on the country’s sovereign debt narrowed by 74 basis points between June and July 2012, widening once the events at Marikana occurred.

S&P and Moody’s lurched into action weeks after the event. Moody’s downgraded the sovereign by one notch to Baa1 from A3 on September 27, while S&P followed suit on October 12, downgrading the sovereign to BBB from BBB+

                                     source: Euromoney Country Risk

ECR data show all of South Africa’s scores for political, economic and structural risk deteriorated in Q3 2012. Economic and political risk assessment scores have deteriorated by 0.5 points in Q3 to 51.5 and 59.7 points respectively.

However, it was the country’s structural assessment score that recorded the largest fall, due to a considerable deterioration in the country’s labour market and industrial relations indicator, which fell by 0.2 points to 4.6 points in Q3 2012. This leaves the country with the worst-performing labour market score among the Brics, according to ECR experts.

                                    source: Euromoney Country Risk

These developments mean South Africa has fallen five places since Q1 2012. The sovereign is now ranked 50th safest globally, in tier three of the ECR rankings.

A recent report by Eurasia Group (October 11) argues that labour instability is likely to persist through to December, pointing to the negative impact this will have on investor sentiment and the country’s wider political stability.

However, an economic-wide contagion should be prevented for the time being, so long as the South African Reserve Bank (Sarb) and the Treasury maintain power to slow down and contain deterioration in the medium term.

The report states:

Impact on mining sector: “Investors should watch for two signs of deeper unrest. The first is opportunism by Cosatu’s [ Congress of South African Trade Unions ] traditionally radical unions like Numsa [ National Union of Metalworkers of South Africa ], which might threaten solidarity strikes if a deal with Satawu [South African Transport and Allied Workers Union remains elusive.

“The second are indications of strike-related social unrest outside of the unions. As mentioned, severe spikes in fuel and food costs will increase the strikes’ pain on ordinary citizens, and increase the risk of violent protest in urban and peri-urban areas.”

Impact on economy: “While a widespread economic breakdown may be unlikely, we continue to anticipate significant political risks to the macro-environment, particularly given negative external conditions and the mounting costs of industrial actions in mining and transport to the economy.”

Firstly, Eurasia group sees “increased fiscal pressures on the government ahead of elections in 2014, as the ruling ANC attempts to maintain its political dominance in the face of sluggish growth, growing economic discontent and continued policy uncertainty independent of the winner at Mangaung”.

Eurasia also expects “an uptick in economically nationalist rhetoric and more limited legislative moves around mining, which will fuel negative sentiments among investors”.

Third, it expects “these policies will limit the treasury’s fiscal space and will increase pressure for encroachments on the independence of [Sarb], though we do think Sarb and the Treasury will maintain sufficient power to slow down and contain a stark deterioration in the medium term”.

ECR Forum:

In the aftermath of the events at Marikana, we asked the following questions to one of our South African experts: What can South African policymakers do to defuse the tensions between mining companies and their employees? And how has the violence at Marikana affected South Africa’s country risk?

Colen Garrow, South Africa economist at private equity company Brait, gave the following assessment in a recent analysts’ forum on

“South Africa’s coveted investment-grade sovereign ratings have been put somewhat at risk by social instability in the mining industry. It is a sober reminder that politics leads economics, and that while the global economy can take some of the blame for social unrest, the inertia in economic policy is equally to blame for the tragedy that occurred at Marikana, an area rich in platinum deposits.

“Investors have often criticized economic policy for having a core weakness – inflexible labour legislation. While a drastic overhaul of these regulations may be needed, no change is likely to happen any time soon, not with the Congress of South African Trade Unions, the largest organized labour body, being part of South Africa’s governing tripartite alliance.”

This article was originally published by Euromoney Country Risk