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South Africa's dithering response to platinum belt strikes spooks investors

Tuesday, 18 September 2012 - 8:00pm IST | Place: JohannesburgLondon | Agency: Reuters
President Jacob Zuma's ill-equipped handling of the crisis are increasing chances of a credit downgrade: Critics.

Wildcat strikes in South Africa's platinum belt have entered a sixth week with no resolution in sight and investors are worried about the government's inability to quell the unrest. Critics say Pretoria's response to the strikes has been slow and ineffective, exposing the ruling African National Congress and President Jacob Zuma as ill-equipped to handle crisis and lifting the chances of a credit downgrade.

The rand has tumbled, insurance against default on South African debt has risen and foreign investors have sold shares in mining companies. "The lack of government appearance or intervention is one of the most concerning things. What's that saying about any crises that we have in this country? It doesn't appear that there's anyone to pull it all together," said Nic Norman-Smith, a fund manager at Lentus Asset Management in Johannesburg.

Violence at Lonmin Plc's Marikana mine last month left over 40 people dead, 34 of them striking miners shot by police in the bloodiest security incident since the end of apartheid in 1994. The killings shocked South Africa and the world but Zuma and his government have done little to show they were on top of the unrest, started by miners demanding higher wages.

"I think they've been particularly poor in addressing it, in addressing the country as a whole," said Mohammed Nalla, an analyst with Nedbank Capital in Johannesburg. For weeks after the Marikana shootings, Zuma mostly avoided the subject while dispatching cabinet ministers to the region for what was seen as symbolic shows of sympathy. Government arbitrators pushed for a "peace accord" to calm the situation, which stoked anger among the strikers who said they wanted to discuss money before anything else.

After weeks of criticism, Zuma's government said on Friday it would clamp down on "illegal gatherings" and police seized weapons from striking miners over the weekend. Some investors fear this will just anger the strikers further. "What you have in South Africa is a weak economy and scary politics," said James Syme, a senior fund manager at JO Hambro Capital Management Group in London, who helps manage 500 million pounds in emerging market equities and is underweight on South African assets. "The policy environment makes no one happy, neither the electorate nor the corporate."

Quality of life
The rand slumped as much as 3.3% last week, and credit default swaps - insurance against debt default - on government bonds rose. Foreign equity investors have cut stakes in mining companies, although some of those positions have been taken up by South African investors, said Rajat Kohli, global head of mining and metals at Standard Bank in London. "There is a possibility that production could fall if the mining strike continues, which is another factor to raise the country risk," said Genzo Kimura, a bond fund manager at Sumitomo Mitsui Trust Asset Management in Tokyo.

Partially led by the Association of Mineworkers and Construction Union (AMCU), the strikes have swept across the platinum belt, home to nearly 80% of the world's reserves and companies including Lonmin and top producer Anglo American Platinum. AMCU is challenging the dominance of the National Union of Mineworkers (NUM), whose leaders have grown rich and powerful from an alliance with Zuma's ANC, which has relied on organised labour for votes.

Striking workers say that politicians and union leaders are out of touch and corrupt. Eighteen years after the end of apartheid, the government has failed to provide basic services such as running water to millions of South Africans, the official unemployment rate stands at 25 percent and protests against squalid living conditions have increased. While the strikers are looking for a huge base pay increase of 12,500 rand ($1,500) a month, their demands also reflect impatience with the pace of change under the ANC.

"It's less about getting a 12,500 rand salary than it is around having a higher quality of living," said Nalla.

Roll up your sleves
After the August 16 Marikana killings, Zuma made a low-key appearance at the site, surrounded by suited aides and bodyguards who shielded him from the sun with a parasol. He spoke to executives and then left to dance at an ANC event despite declaring a week of mourning. Critics said this showed him more beholden to special interest groups than to poor South Africans.

Zuma's government should "be visible, and be visible where people are," said Terence Craig, chief investment officer at Element Investment Managers in Cape Town. "Get out to Rustenburg with your ministers and be sitting there prepared to talk and roll up your sleeves on a daily basis until this is resolved." In a sign the ANC is waking up to the crisis, Finance Minister Pravin Gordhan on Friday said the unrest could be "extremely damaging" for the economy.

Previously he said it was unlikely to have a significant impact on growth. One of the biggest concerns for investors is the outlook for South Africa's credit rating. Since November all three global ratings agencies - Standard & Poors, Moody's and Fitch - have downgraded their outlook for South Africa to negative, citing structural problems. A ratings downgrade would spark an exodus from the bond market, driving up borrowing costs South Africa can ill afford. Since South Africa relies on foreign portfolio flows to fund its trade account and fiscal deficits, a reversal of those flows would be debilitating, Nedbank's Nalla said.

Malema threat
The government's lack of action has also opened the door for ANC renegade Julius Malema. Malema has seized on the labour conflict to bait and harry Zuma before a year-end party leadership conference that will test South Africa's political stability. The 31-year-old populist, who is calling for state takeover of the mines, has urged the strikers to make the industry "ungovernable" and has accused the ANC leadership of "sleeping with capitalists". While Malema is not seen as a potential rival to Zuma now, his activism is likely to help a campaign by some ANC factions to replace the president with Deputy President Kgalema Motlanthe.

"There is a real risk that some of the other ANC members try to displace Zuma, take advantage of his current weakness," said Manik Narain, an emerging market strategist at UBS in London. The government could respond to the unrest with costly fiscal stimulus or revive talk of mining nationalisation, both of which would scare off investors, Narain said. The ANC has so far shunned the possibility of nationalising mines, but a party strategy paper did recommend greater government intervention and more taxation.

"People who believe that Malema does not present a danger to South Africa have missed the point," said Richard Farber of Worldwide Capital, a Johannesburg brokerage. "It is his ideology that presents the danger and that is gathering momentum." South African police on Monday barred Malema from addressing striking miners, a sign the government is trying to rein him in.


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