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South Africa Risks Downgrade as Rand Tumbles

Tuesday, 21 May 2013 | 1:14 AM ET
Could Unrest Prompt Downgrade for South Africa?
Peter Attard Montalto, emerging market economist at Nomura International, talks about the South African mining sector, the potential rise of further union unrest and the impact it would have on the country's economy.

The South African rand tumbled for a ninth session in a row on Tuesday to a new four-year low after an industrial union demanded a hefty pay hike. That raised fears that labor problems that began in the mining sector may be spreading across the economy.

According to one analyst, the mining sector troubles have also increased the chances of another credit rating downgrade, which has the potential to hit the attractiveness of Africa's largest economy as an investment destination.

(Watch This: South Africa Labor Unrest Pushing Up Costs)

"We will see the rand weaken a lot further from here as this develops," Peter Attard Montalto, director and emerging market economist at Japanese investment bank Nomura, told CNBC.

"This has spread across now into the gold and coal mining sectors…and into the long end of the credit curve, because people are now considering the risks of a downgrade. Credit ratings agencies have talked actively about further violence and strike action being a trigger for a sovereign downgrade."

(Read More: Why Gold's Fall Is No Big Deal for South Africa)

South African platinum and gold producers have been subject to a series of violent strikes which began in early 2012 and included a violent confrontation at the Marikana mine in August last year, where 34 striking miners were allegedly shot dead by police.

Over the weekend, reports emerged that the National Union of Mineworkers had called for pay rises of up to 60 percent. Last week, a wildcat strike at Lonmin, the world's third biggest platinum producer, also renewed fears of a resurgence of violence.

Investors have scrambled to dump the South African currency in response. The rand has fallen around 4.5 percent over the past week, weakening to 9.4925 to the dollar on Tuesday.

Miners sing and dance whilst holding South African bank notes in Lonmin Platinum Mine near Rustenburg, South Africa, Tuesday, Sept. 18, 2012. Striking miners have accepted a company offer of a 22% overall pay increase to end more than five weeks of crippling and bloody industrial action. (AP Photo/Themba Hadebe)
Themba Hadebe
Miners sing and dance whilst holding South African bank notes in Lonmin Platinum Mine near Rustenburg, South Africa, Tuesday, Sept. 18, 2012. Striking miners have accepted a company offer of a 22% overall pay increase to end more than five weeks of crippling and bloody industrial action. (AP Photo/Themba Hadebe)

Nomura's Montalto said he expected tensions over labor relations to escalate further.

"We are seeing a structural shift in South Africa particularly in the mining sector. These big structural shifts will result in cost squeezes for miners and a lot more violence unfortunately," he said, referring to longer lasting changes rather than temporary ones.

"The mining sector is used to cyclical strike action - not structural strike action - and that is the real trouble now. Investors are not fully appreciating that we are in a different world in terms of labor relations."

(Read More: Global Miners Face Rising Risks in South Africa)

South Africa has been downgraded by all three major global credit rating agencies over the past year as fears over strike action reduced confidence in the economy.

Moody's Investor Services downgraded South Africa's sovereign rating from A3 to Baa1 in September, while Standard & Poor's revised down its rating of the country from BBB to BBB in October. Fitch Ratings followed suit in January this year, also downgrading South Africa one notch to BBB.

South Africa's economic growth has concerned investors, as weak commodity prices take their toll on the economy - of which mining is a key sector. The economy grew by 2.5 percent in 2012, down from by 3.5 percent in 2011.

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