Mine tragedy highlights S.Africa investment risks

Aug 20, 2012, 12:47 PM EDT
REUTERS/Siphiwe Sibeko

* Lonmin tragedy highlights unemployment, inequality

* Investors could demand bigger discount from S.Africa

* Gov't response critical for investor confidence

By David Dolan and Tosin Sulaiman

JOHANNESBURG, Aug 20 (Reuters) - The bloody confrontationbetween striking South African miners and police last week hasraised hard questions about investing in Africa's top economyand the ruling ANC's ability to deliver on overdue promises ofjob creation and change.

The crackdown against the protesting miners at Lonmin Plc has left more than 40 dead and a nationseething over the deadliest police action in post-apartheidhistory.

It also puts focus on South Africa's most stubborn problems:chronic unemployment and a growing black underclass - oftenuneducated and underpaid - that has seen few benefits from theend of apartheid nearly two decades ago.

"It's reinforcing a perception that a lot of people have hadfor decades: that South Africa is a risky place to put yourmoney," said Peter Major, a mining consultant at Cadiz CorporateSolutions in Cape Town.

"It will shine a brighter light on this country and peoplewill see a lot of the problems that we've got that they wouldn'thave really noticed otherwise."

For investors, the Lonmin tragedy is an uneasy reminder thatbetting on South Africa includes some considerable risks andthey may need to demand a bigger discount before putting moneyin local assets.

Jittery investors are particularly bad news for a countrythat has struggled to consistently draw foreign directinvestment, said Kevin Lings, chief economist at asset managerStanlib.

"We need to attract much more foreign direct investment thatresults in capacity expansion, employment and ultimately someexports. This incident is another obstacle to us being able toattract that type of investment."

Markets have so far reflected the concern. The rand slumped by 1.5 percent on Friday, and has remained weak since.



The long-term worry for South Africa is that investors startdemanding more for their risk, as they do with Russia now.

Among the major emerging markets of Brazil, Russia, India,China and South Africa - the "BRICS" - Russia's equity marketusually trades at lowest multiple, in part due to investorconcern about corruption.

Russian equities are trading at just under 5 timesearnings, according to Thomson Reuters data, compared with 11times for Brazil, South Africa and China and 15 times for India.

"Lonmin, government policy-makers, the unions, all of themhave a vested interest in appeasing investor anxiety," saidAdrian Saville, chief investment officer at Cannon AssetManagers in Johannesburg.

"If that anxiety isn't appeased, in the best case investorswill demand a higher price for the risk that they take. In theworst case, they just won't take the risk at all."

Investors' long-term response will largely depend on how thegovernment deals with the killings. President Jacob Zuma, whohas declared a week of mourning, has ordered an official inquiryinto what he called "shocking" events.

Under Zuma, the ruling African National Congress hasincreasingly drawn criticism for ignoring widespread inequalityin favour of enriching the politically connected.

Per capita GDP is over $8,000 a year but nearly 40 percentof the population lives on less than $3 a day.

Income distribution in South Africa today is even moreunequal than at the end of apartheid in 1994, according to theWorld Bank's Gini index, which measures income equality.

Senior members of the ANC includingpolitician-turned-businessman Cyril Ramaphosa have becomemulti-millionaires through lucrative "black empowerment" deals.Formerly the head of the National Union of Mineworkers,Ramaphosa now sits on Lonmin's board.

For investors, the biggest reassurance would come fromconcrete moves by the government to improve education and fosterjob creation, although those remain a huge challenge.

"The events as they happened last week are part of theworries and concerns that we have at the moment with regards toSouth Africa's credit story," said Konrad Reuss, managingdirector for South Africa and sub-Saharan Africa at Standard andPoor's.

"It's critical to see now what kind of responses are goingto come forward in the coming weeks and months." (Additional reporting by Xola Potelwa in Johannesburg; Editingby Pascal Fletcher)