Last week was an eventful one for the iShares MSCI South Africa ETF (NYSEArca: EZA). The largest US-listed exchange traded fund dedicated to stocks in Africa’s second-largest economy slid almost 5% after the government removed the country’s finance minister and his deputies.
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.
Some analysts also believed that palladium could continue to shine as tightening market conditions will continue through 2018. Traders have increased positioning in future market as automobile sales hit record highs, especially with rising automobile sales in China.
Last week, South African President Jacob Zuma removed Finance Minister Pravin Gordhan, news that spooked investors and sent EZA tumbling in the last two trading days of the first quarter.
“The South African Communist Party, an ally of the governing African National Congress, had earlier lodged a formal objection to plans to dismiss Mr. Gordhan, who is widely respected internationally,” reports the BBC.
The news was not well-received among the international investment community.
“The cabinet reshuffle will heighten tensions within the ANC and increase political instability as the party focuses on its policy conference in June and leadership contest in December. The ANC faction weakened by the reshuffle is likely to fight back and challenges to the president could become more open. The political backdrop increases the risk that the government will resort to costly expenditure measures or legislation that will weaken economic growth to stabilise its support,” said Fitch Ratings in a note out Friday.
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.”
“Continued political instability that adversely affects standards of governance, the economy or public finances, was one of the ratings sensitivities we highlighted in November when we revised the Outlook on South Africa’s ‘BBB-‘ rating to Negative from Stable,” adds Fitch.