Thursday, January 22, 2009

More Bad News for South Africa

Financial Times
All Africa

South Africa’s economic prospects may be dimming amid the global credit crisis. A recent post described Fitch’s lowering South Africa’s credit prospects, and more evidence points to potential bad times ahead for the country. South Africa’s economy relies heavily on exporting its commodities, particularly precious metals, and commodity prices have plunged recently. In addition to the price drop, global demand for its commodities have also dropped.

Another big concern is their high unemployment rate. Right now it sits at 23%, and the mining industry is expected to lose an additional 14,000 jobs. The slump in demand for their precious metals is also affecting some of their other industries. Richemont, a Swiss luxury brand, said that it is facing the toughest financial conditions it has ever faced and that their recent performance "debunks the myth that when times get tough, the rich go shopping".

South Africa has maintained since the beginning of the global credit crisis that they were insulted from its reach. Many factors have been in their favor. For one, their banking industry is heavily regulated which prohibited their banks from buying the credit derivatives that have wrecked havoc on Western economies. However, the global credit crunch will make it hard for the country to finance its current account deficit of 8%. South Africa’s currency, the Rand, is also losing value, which also exasperates its account deficit problem. Whether the country wants to admit it or not, the cards appear to be stacked against economic growth.

1) Gold typically does well in bad times as people view it as a safe investment. If this is true, then why has demand for South Africa’s precious metals been decreasing?
2) Though the global credit market is tight, South Africa’s banking system appears to be in good shape. Can South Africa’s banking system provide the necessary credit to help spur industries and new employment?

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