South Africa: Post-Apartheid Dream in Total Disarray

Includes: AFK, EZA, GAF, JNB, SZR
by: Rakesh Saxena

Is South Africa poised to complete the transition from apartheid to state capitalism? Shortly after the ruling African National Congress issued its election manifesto over the weekend, South African economist Iraj Abedian wondered how the business sector will react to ANC president Jacob Zuma’s commitment to spend aggressively in everything from infrastructure and industry to health care, education, social security and, yes, soup-kitchens for the unemployed and hungry.

The South African rand sank to 9.74 against the dollar in late-Friday trading in Johannesburg, in the wake of news that the manufacturing sector had slumped for the second straight month and that the 2008 drop in prices for commodities and platinum, which competes with gold as the biggest export earner, has begun to have a significant impact on foreign currency balances. Not that the rand needs too much bad news to attract selling; South Africa’s official jobless rate is 25%, reliable unofficial unemployment estimates are in the 35-40% range, roughly 48% of households live in poverty and over three million Zimbabweans, fleeing the severe food crisis north of the Limpopo River have swelled the ranks of the virtually unmanageable casual (undocumented) labor force which exerts a powerful pressure on wage levels.

Senior bankers in Johannesburg and Cape Town predict that the rand will extend last year’s 28% slump and hit 10.50 (per dollar) within the first half of 2009. But given the deep structural problems within the domestic economy and worsening global trade conditions, a level close to 11.50 is more likely, even inevitable.

While worries about a Zuma-led government accelerating the post-apartheid land reforms program may be overblown, few will argue with the fact that South Africa’s commercial agriculture is now at the real risk of knee-jerk legislation. On the one hand, South Africa can see how badly Zimbabwe has faltered in its plans to transfer productive land from white farmers to impoverished blacks. On other hand, without some form of substantive land distribution, South Africa cannot even hope to fight unemployment, poverty and increasing restlessness.

Since the share price of many of the counters on the Johannesburg Stock Exchange depends largely upon the price of exportable items, positions in South African Exchange-traded Funds (EZA, JNB), represent a dual play on (a) the future of the South African economy and (b) the prices of gold, silver, platinum, uranium and diamonds. Considering that the rest of the continent is perhaps in even worse financial shape than South Africa, relatively purer short-Africa positions can be achieved via regional ETFs (AKF, GAF); WisdomTree’s SZR offers exposure to the South African money markets and to the rand.

In one key, fundamental respect, the problems of the Dark Continent (it really is darker at night in Africa than in the rest of the world) can be traced back to the territorial divisions determined amongst European powers (including Britain) at the 1884-1885 Berlin Conference summoned by Otto von Bismarck. The thrust of the Scramble for Africa which followed with renewed intensity in the 1890s was access to Africa’s mining riches; the process of demarcating borders paid little heed to the continent’s numerous self-sufficient natural economies, to the need to promote the upgrading of crop yields to support rising populations, and to the task of efficiently integrating tribal-era communities into the modern world.

As a consequence, the entire continent, particularly Sub-Saharan Africa, continues to be plagued by successive waves of massive labor migrations. “The borders are porous, there is no work in the homelands and so those desperately looking to make ends meet have no choice but to head to the cities of South Africa, the mines of the Congo, the red-light districts of oil-rich Luanda, and wherever else a window of opportunity opens up,” said an aide to Bishop Desmond Tutu at a poverty conference in Pretoria, South Africa’s capital, recently. “We must find a solution to this never-ending cycle of migration, hunger and disease if we are to make any social progress at all.”

For Jacob Zuma, and his allies in the South African Communist Party and in the Congress of South African Trade Unions, the solution is fairly straightforward: a wave of nationalizations in agriculture, mining and industry in order to, ostensibly, place the country’s vast resources in the hands of the black majority. Another version of state capitalism, another highly persuasive reason to stay short South Africa and Africa well beyond the medium term.

Disclosure: Author holds a short position in SZR

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