South Africa ETF in a Precarious Spot

When Standard & Poor’s downgraded Brazil’s sovereign credit rating to junk status in September, market participants immediately began pondering which emerging market would be next to suffer the junk downgrade fate. South Africa was one of the first to be mentioned.

Down more than 11% over the past month and nearly 21% year-to-date, the iShares MSCI South Africa ETF (NYSEArca: EZA) has reflected that concern. Compounding EZA’s woes is the perceived vulnerability of the South African economy, Africa’s second-largest behind Nigeria, to rising U.S. interest rates.

Earlier this year, South Africa, a major metals producer, saw its trade deficit widen to about 4.5% of GDP after a wave of strikes damaged the mining industry and sharp fall in exports. With the current accoutn of balance of payments still under pressure, some observers argue that South Africa is more vulnerable to capital outflows, BusinessDay reports.

On Friday, Fitch Ratings pared its rating on South African debt to just one level above junk while S&P reduced its outlook on the country’s bonds to negative from stable.

“S&P said South Africa “faces domestic constraints including an inadequate electricity supply and overall weak business confidence inhibiting substantial private sector investment … the current account deficit will have been smaller in 2015 than in 2014 owing to lower oil prices, weak domestic demand, and import compression from the weaker rand, while external portfolio inflows have remained fairly stable. We expect external deficits will moderately increase in the next few years as the economic environment improves,” reports Dimitra DeFotis for Barron’s.