When Nelson Mandela came to power in 1994 he reached out to South Africa (SBK)’s poor and to its rich by promising jobs and a secure climate for business. Eighteen years later, his country has a 24 percent unemployment rate and a debate over nationalizing mines is deterring investment.
Economic growth is less than half the 7 percent level the government says is needed to make inroads into the highest jobless rate of 61 countries tracked by Bloomberg. Stocks have underperformed Brazil and Peru. The ruling African National Congress is considering raising mine taxes and President Jacob Zuma’s government is pushing through a secrecy law that could impede reporting on state corruption.
“They’ve got to make South Africa a much more attractive place for investment,” Mark Mobius, who oversees about $40 billion as executive chairman of Franklin Templeton’s Emerging Markets Group, said in an interview this month in Dubai. “I’m not only talking about foreign investment,” he said. “I’m talking about local investment.”
A lack of opportunity for poor black South Africans, who constitute 90 percent of the population of 50.6 million, has fueled violent street protests and given impetus to a push by the ANC’s youth wing for the seizing of mines, banks and land. That, together with inadequate power supplies and a labor system as rigid as in France and Sweden, is pushing investors to consider alternatives from Australia to Peru.
Policy uncertainty is preventing the country with the world’s biggest mineral reserves, as assessed by Citigroup Inc. in 2010, from fully benefiting from demand in China and India. South Africa (SBK) attracted $4 billion in mining investment in the first nine months of last year while Australia, a country that exports many of the same minerals to China, got $34 billion.
Between 1994 and 2010 South Africa secured $46.8 billion in foreign direct investment, according to the United Nations. That’s an eighth of what Brazil has attracted and less than in Turkey, Malaysia, South Korea, Colombia and Peru. Foreign direct investment in South Africa fell from $9 billion in 2008 to $5.4 billion in 2009 and $1.5 billion in 2010.
“The debate about nationalization, as championed by the youth league, has been very damaging to South Africa’s image in the eyes of the investor community,” said Prince Mashile, chief executive officer of Johannesburg’s Forum for Public Dialogue, an independent research institute, in an interview. “It planted seeds of uncertainty.”
South Africa’s stock markets also have underperformed other emerging markets. Since the end of June 1995 an index of the biggest companies has risen fourfold when measured in dollars, less than a third of the rate of the benchmark index in Brazil and a fourth of the gain posted by Peru’s key index. This year international investors are selling South African equities at the fastest pace since 2008.
In 2008 Rio Tinto Group (RIO) halted work on a $2.7 billion aluminum smelter in South Africa because of the power shortage and expansion of the world’s biggest ferrochrome industry has slowed. Last year AngloGold Ashanti Ltd. (ANG) scaled back an $800 million plan to extend the world’s deepest gold mine.
Rio says it’s considering or building investments in countries including Guinea, Mongolia and Mozambique, while AngloGold is examining opportunities in Colombia, the Democratic Republic of Congo and Australia.
Since May 9, 2009, when Zuma became president, South African foreign-currency bonds have returned 37 percent, less than the 46 percent average of emerging market dollar bonds tracked in the JP Morgan EMBI Emerging Market Bond Indices. The benchmark dollar bond yields 4.06 percent compared with 3.48 percent for the comparable Brazilian bond and 2.20 percent for U.S. Treasuries.
The government blames some of the lack of progress on the economy handed to it by the apartheid state: a sanctions-hobbled economy that had grown at an annual average of about 1.2 percent since 1980 and was still under capital controls.
“Constructing something out of the mess we had pre-1994 is not an easy task,” Finance Minister Pravin Gordhan told reporters in Cape Town on Feb. 22. “Some of the skepticism of the state is legitimate.”
Living standards for most poor South Africans have improved since 1994: More than 90 percent have access to clean water, up from about 62 percent; more than three-quarters of households are electrified, from 51 percent; and the number of people receiving welfare grants has risen more than five-fold to almost 16 million.
South Africa has among the best infrastructure systems and most developed financial markets in Africa, and should attract new interest from investors as the global economy stabilizes and risk appetite returns, said Jeremy Gardiner, a director at Investec Asset Management, the nation’s biggest independent money manager.
“South Africa is not going to go the way of Zimbabwe,” he said in a March 22 interview from Cape Town. “We shoot ourselves in the foot sometimes,” by failing to convey the country’s true potential.
Since the first democratic elections the economy has expanded in every quarter except for four, the country’s benchmark stock index rose to a record this year and interest rates are at a 30-year low. Foreign direct investment rose to 42.1 billion rand last year ($5.6 billion), according the South African Reserve Bank.
“The country is a very different country from what it was in 1994,” Mashile said.
Still, a malfunctioning education system excludes millions of black youths from the mainstream economy and much of the population lives in one of the country’s 2,700 shantytowns. The Gini coefficient, a measure of income inequality, is 0.68, one of the highest in the world and more than the 0.67 at the end of white segregationist rule.
The World Economic Forum’s 2011-2012 Global Competitiveness Report ranked South Africa 139th out of 142 countries in terms of the competitiveness of its hiring and firing practices, just behind France and Sweden and ahead of Portugal. It was 138th in flexibility in determining wages, just after Sweden, and 127th, after Mali, in the quality of its primary education system.
“We’re right at the very, very bottom of labor flexibility internationally,” said Andrew Levy, who heads his own labor research company and advises multinationals. If nothing is done, “the implications are social unrest, mass populist movements arising, looting, violence, who knows? We’re going to lose our position as the economic powerhouse of the continent unless something changes.”
The ruling party will debate policy changes at conferences in June and December. While an ANC-commissioned study found after a more than two-year debate that seizing mines would be an “unmitigated economic disaster,” it recommended imposing a 50 percent tax on the profits of mining companies earning returns in excess of 15 percent, levies on the sale of prospecting rights and more taxes on companies based in offshore tax havens.
“Those are very intrusive measures,” Peter Leon, head of Africa mining and energy projects at law firm Webber Wentzel, said in an interview in Cape Town last month. “The government and the ANC have a big job on their hands to assure investors that this is a safe country to invest in.”
Since November, Moody’s Investors Service and Fitch Ratings have cut South Africa’s credit-rating outlook to negative from stable, citing heightened political risk and concerns over growth. The country is rated A3 by Moody’s and BBB+ by Fitch.
Eurasia Group, a New-York-based risk analysis company, identified South Africa in a Jan. 3 report as one of the top geopolitical areas with potential for instability in 2012 because of the “ascent of populism” within the ANC. Other countries named were North Korea, Pakistan and Egypt.
No Turning Back
The ANC’s Youth League, whose leader, Julius Malema, was expelled from the party on Feb. 29 for undermining the party, says it won’t abandon its campaign for the state seizure of mines, no matter what the party decides.
“We are quite aware there is general concern among the investor community” about nationalization, Enoch Godongwana, chairman of the ANC’s economic policy committee, said in a Feb. 6 interview in Cape Town. “We are going to bed the matter down in December. I may well say the debate is not necessary but I can’t stop those who want to raise it from raising it.”
London-based Anglo American Plc (AAL), Australia’s BHP Billiton Ltd. (BHP) and Xstrata Plc (XTA) of Zug, Switzerland, own mines in South Africa, the world’s biggest producer of platinum, manganese and vanadium.
Even more damaging to the legacy of Mandela, now 93 and in poor health, are proposed new restrictions on media freedom and judicial independence. South Africa’s first black president had hailed those rights as primordial when the constitution was formulated in 1996.
On November 22, the ruling party used its majority in the National Assembly to pass a law that proposed jail sentences of as long as 25 years for anyone obtaining classified information, even if its disclosure was in the public interest.
Last month, the government announced plans to review how judgments of the Constitutional Court, the country’s highest court, had impacted “on the transformation of society.” The opposition Democratic Alliance said the decision placed the court’s independence at risk. Yesterday the country’s Department of Justice said rulings of the Supreme Court will be reviewed as well.
“There is a tendency of those in government and some close to it to blame the constitution for the inability of the government to deliver,” said George Bizos, a lawyer who defended Mandela in his 1960s treason trial. “There are worrying signs.”
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