Opportunities in South Africa Beyond Zuma: Mining and Agriculture
Despite the continuing negative reporting in the press about the broad political and economic situation in South Africa, the country offers excellent investment opportunities to investors in the mining and agriculture sectors.
Political and business commentators are right to attribute South Africa’s troubles to the missteps of Jacob Zuma, the country’s controversial president engulfed in myriad of political scandals. The most recent of saw Pravin Gordhan, the Finance Minister, fired. But even if Gordhan’s departure put an end to hopes to curtail the government’s budget deficit and likely directly led to the downgrade of the sovereign credit, it is a mistake to solely credit Zuma with all South Africa’s economic and political misfortunes. By the time Gordhan was fired in March 2017, the country was already in technical recession.
Two of the main reasons that prevented South Africa from fully recovering from the financial crisis, however, were the glut in commodity prices and the 2015 drought. These challenges are entirely external to the country and political considerations nearly irrelevant for them. Irrespective of government policy, these challenges are now also being overcome. Combined with the volatility in the Rand, South Africa’s currency, and the low investor confidence, both of which are attributed to poor government management, these developments offer certain investors the opportunity to enter the South African mining and agriculture sectors and position themselves for long-term success.
Commodities are the country’s largest export and suffered heavily during the global commodity price glut over the past 3–4 years. Gems and precious metals, ores, iron, and aluminum represent nearly a third of the country’s exports. Although the price recovery has been less than inspiring, growing demand has helped South Africa’s mining industry post an exceptional 10% growth quarter-over-quarter.
Even more optimistic is the growth in agriculture. The sector is recovering from the 2015 drought, the worst in a hundred years, allowing for even higher growth opportunity. Bloomberg reported quarter-over-quarter growth of over 20 percent. Supporting the industry are also the reduced barriers to trade, including a 2016 agreement between the United States and South Africa to resolve disputes on bilateral trade in agricultural products, which now allows South Africa to fully enjoy the benefits of the Africa Growth and Opportunity Act (AGOA).
Of course, investors should not lightly discard South Africa’s broader political and economic misfortunes. South Africa entered recession in 2017 for the second time in a decade. Business confidence remains at an all-time low, the country’s sovereign debt reduced to junk, and the Rand, South Africa’s currency, is the most volatile currency in the past 12 months.
However, South Africa is much more diverse and complex marketplace that goes far beyond the wishes and desires of a single man, even if a powerful one. As shown by the ebbs and flows of the mining and agriculture sectors, sectors are often affected much more by external factors than by internal political uncertainty. As such, investors should demand that their political risk advisors not only understand personal and political wimps of individual country leaders, but also understand broader global geopolitical and economic trends, going beyond the sensationalist headlines often appearing in news outlets. In other words, internationally-minded corporations need a coherent foreign policy.