November 21, 2017

South Africa has long remained in the top of the unfortunate listing of most criminal countries in the world. Far from curbing the insecurity problem, the government has let the situation escalate, to the point that instability is a problem no longer for citizens only, but also for businesses. Investors are now thinking twice before investing in what used to be the most promising Southern African State.

Most countries can handle one or two sources of insecurity, few can handle as many as South Africa is confronted with these days. Adding to the long-lasting crime rate for which South Africa is notorious, the political timetable and timeline are rocking the boat, and the country’s judicial system is acting out.

Data was drawn from 60 countries by the United Nations Office on Drugs and Crime, between 1990 and 2000, and ranked South Africa second, due to extremely high level of gun violence, knife violence (mostly localized in Cape Town) and rape, along with other types of misdemeanors. Since the 2000s, a falsely reassuring drop in the rate of murders has been posted, which hides an increase in the number of murders (the rates dropped only because the population has increased).

This accounts for a long-lasting problem which South Africa has long had to deal with, resulting in deterrence to investors from establishing businesses in the country, in a proportion which remains difficult to quantify exactly. Expats Arrivals warns: “Crime and safety in South Africa are major factors for expats considering moving to the country. Crime rates remain high, petty theft and opportunistic crimes are common, and armed robberies and hijackings are also fairly frequent in certain areas. Expats should be aware that crime happens all over South Africa, so expats and locals alike will need to take the necessary precautions to secure their homes and possessions.” This hampers investment into the country at the individual level. Then comes the business level.

In addition to this hereditary problem, comes the political agenda currently being led in South Africa. In its recent policy to counter-balance the racial divide in ownership rates, the government has just reinforced the plan which forces companies to sell shares to black shareholders, at the rate of 26, and now 30%. Investors fear new shareholders will be selected on the basis of their skin color, rather than on their strategic skills. Whatever the outcome, the drastic reform will necessarily create large-scale instability as a forced transfer of ownership is under way in the nation’s industry.

Bloomberg immediately reacted to forewarn potential investors of the risk they would be taking, should they invest in South Africa : “South African regulators unveiled a new mining charter to force companies to give more ownership to black shareholders, sparking a selloff across the industry. Anglo American Plc and Sibanye Gold Ltd. shares tumbled after the Department of Mineral Resources introduced requirements that local companies must ensure 30 percent of their shareholders are black, up from a previous level of 26 percent. Several of South Africa’s biggest mining companies may have to sell new stakes, raising the risk of dilution for existing owners. The new rules “could pull the rug right from under the industry’s feet,” said Andy Pfaff, chief investment officer of Vanguard Derivatives, a South Africa-based broker. “It’s certainly not going to help with attracting foreign investment into South Africa.”.

The mining corporation is preparing a lawsuit to stymie the government’s plan, but it is unlikely that they will be able to block the momentum, and investors “will get hit”. This already induces instability on the general level of macroeconomics.  However, lower-scale disputes at the market level may have consequences just as bad.

Lastly, in the most unexpected way, a South African court has thrown a major rock in the diplomatic pond, with its decision to acquiesce the Polisario’s request to detain a Moroccan phosphate-laden ship in Port Elizabeth. The Polisario front, a Marxist and armed separatist movement from the Saharan desert, created during the height of the Cold War with the help of Algeria and Russia, aims for independence and control of natural resources. In an attempt to pressure Morocco, the Polisario asked a South African courthouse to produce a detention warrant to withhold a ship in Port-Elizabeth, laden with Saharan phosphate rock. The move was a long shot, because courts would usually not consider disrupting an ongoing UN negotiation process… as it would be for international courts to handle. But the Pretoria judge issued the order, resulting in the immobilization of the ship. The New Zealand Herald reported: “A $7 million shipment of phosphate bound for New Zealand will remain held at a South African port due to a bitter dispute over who has rights to the resource, a South African court has ruled.” Even the client to whom the phosphate cargo was destined is “comfortable with the legality and ethics of its phosphate source in the Western Sahara, and said it was the first time a shipment had been seized and it was working with suppliers and lawyers to ensure it got through.” Unsurprisingly, tensions between Pretoria and Rabat have risen. Moroccan foreign trade minister and government spokesman M. El Khafi complained that the South African court’s decision to judge the case on its merits was “in contradiction with international law”.

The dispute is yet to be settled, but businesses are likely to be very spooked by the idea of having their cargo seized, because of international negotiations they are not part of, or even have no knowledge of. The Polisario front is beating the iron while it’s hot, and will attempt to have more ships seized, as they warned vessel owners around the world in a recent letter – presumably in South Africa, the only place where judges have shown complacency towards their demands. The port of Cape Town handled 10 million tons worth of containers per year until now. Port Elizabeth has the largest ore-loading equipment in the Southern hemisphere but which is likely to be under-used from now on, if cargo is liable to be ripped out of customer’s hands.

The conjunction of all the factors stated above has created unprecedented instability for South Africa, and investors are turning their eyes to the credit rating, which has recently dropped to a dismal BB+, making the country almost an anomaly within the economic Western world. South Africa has now entered the “non-investment” category, also know as “junk” status, after a combined revision of the three main global ratings agencies. If the current crisis develops any further, it may take years or decades for South Africa to recover its position, as other African countries are on a steady rise.

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Brian Nelson