After struggling during the commodities the past two years, the iShares MSCI South Africa ETF (NYSEArca: EZA) is up a respectable 2.1% year-to-date thanks to resurgent precious metals prices. However, there are lingering concerns that Africa’s second-largest economy could be stung by a sovereign credit downgrade.
The country is a major gold producer as well as being as one of the top two producers of palladium and platinum in the world. South African miners have been enjoying improved margins due to a surge in prices on raw materials like iron ore and platinum while the rand currency depreciated against the dollar.
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. However, South African stocks are bucking negative sentiment that might be lingering toward the country’s bonds.
Many still believe South Africa’s economy has its work cut out for it as the government tackles high unemployment and high debt. Credit agency Fitch recently downgraded South Africa to just one notch above speculative-grade status and stated that the dismissal of Nene had “raised more negative than positive questions.”[related_stories]
“The pressure on South Africa remains very significant, and in Poland the outlook looks bleaker, not only due to jittery politics but also due to deteriorating macro prospects,” according to a Societe Generale note posted by Dimitra DeFotis of Barron’s.