FOREX Africa: South Africa’s Vicious Strikes Cycle Could Hurt The Rand

By Jeffrey Cavanaugh AFKI Original Published: July 1, 2014, 3:25 am

As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.

Labor pains

This past week saw the conclusion of the debilitating labor dispute that shuttered production at the world’s largest platinum producer for five months.

The strike, which saw members of the Association of Mineworkers and Construction Union of South Africa down tools for five months, affected output at the country’s platinum mines and cost mining firms Lonmin, Anglo American Platinum, and Impala Platinum a combined $2.25 billion after they refused an initial demand by workers for an immediate doubling of wages at their respective mines.

After five months of labor strife that saw only a moderate increase in prices, the mineworkers succeeded in winning a 20 percent increase in wages.

Prior to the strike many of South Africa’s platinum shafts were already losing money and the hit to the sector’s bottom line from the production stoppage and now a large increase in its wage bill will likely not help them return to profitability anytime soon.

Indeed, word from several companies involved in the just finished strike is that restructuring—code for closing loss-making mines—will soon start.

What’s more, the damage inflicted on the economy by the platinum strikes follows that inflicted last year when construction workers and gold miners struck for higher wages—an action which cost industry $40 million a day.

The 2013 strikes also triggered some of the worst instances of violence seen in the country since the days of apartheid when South African police open fire on protesting workers.

Unfortunately for South Africa, however, the ending of the platinum strike does not look to be ending the country’s labor unrest as now another industrial action—this time by the country’s engineering and metalworkers—looks set to start as of July 1.

Last year a four-week strike by more than 30,000 members of the same union at major auto makers cost industry $2 billion.  Now it looks like industrial action will be much more widespread and include a far greater portion of the powerful union’s 220,000 members.

Among the companies likely to be targeted, say media reports, are Bell Equipment and the Dorbyl industrial group, but the big fear is that labor unrest could spread once again to auto sector as it did in 2013.

Another big concern though with the latest strike is that it could also impact the country’s electricity utility—Eskom—since 10,000 workers of the NUMSA have been picketing and demanding higher wages from the state-owned firm in recent days.

While legally prevented from going on strike due to Eskom’s classification as a vital service, labor unrest could nonetheless impede operations and there is no guarantee that the state utility might not see wildcat strikes that are not officially sanctioned by the union.

If this occurs large parts of the country could potentially see power outages, further dampening the country’s economic prospects.

All this is further bad news for South Africa, which has been trapped in a low-growth trajectory since the global financial crisis slackened demand for industrial commodities in 2008.

Indeed, S&P recently downgraded South Africa’s foreign and rand-denominated debt ratings by one notch each, to BBB- and BBB+, respectively, putting the country just above S&P’s  junk-bond status. Combined with the Fed’s tapering policy and the result, as one might expect has not been pretty for the South Africa’s currency.

Indeed, though the rand has recovered somewhat from a multi-year low of 11.30 to the dollar it hit in January, it is still near lows last seen in the depth of the financial crisis in 2008 when South Africa’s currency hit 11.78 to the dollar in late October of that year—just a month after Lehman Brothers collapsed into bankruptcy and the world fell into an economic chasm from which it has yet to totally recover.

This latest industrial action could once again put pressure on the rand and could lead to the currency hitting that previous low once again or even the dreaded 12.00 to the dollar mark if the strike is prolonged and severe enough—especially if Eskom is hit by the action.

Unfortunately, those hoping for a quick result may be disappointed as the string of effective victories that labor has won so far has likely both whetted the appetite for further wage increases and given both South African workers and the unions that represent them the impression that industry will eventually cave in.

While this might be true of the mining sector—after all mineral deposits cannot be outsourced elsewhere—manufacturing is another story.  If another wave of strikes hits the country’s auto sector and other manufacturers the long-term damage to this sector of the South African economy could be substantial as firms look to relocate elsewhere in Africa.

So, watch what happen in South Africa closely.  If labor continues to press its advantage through widespread industrial actions the South African economy will continue to do extremely poorly and could even slip much further.

This will mean continued downward pressure on the rand, the possibility of further ratings cuts, and a limit to how much foreign firms will want to see invested into what is now Africa’s number two economy.

In the end this could choke off growth and put immense pressure on the ANC-dominated government to do something, anything to mollify the country’s angry workers.  If that comes to pass, then the lows we are seeing the rand trading at now could be just the beginning.

 

Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFKInsider, Mint Press News and BAM South. 

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