The latest news out of South Africa is that its economy grew an "unexpected" 5.3% in the fourth quarter.

Perhaps what perplexed economists about the country’s growth last quarter [and last year] is the wealth of negative economic news coming out of South Africa.

For instance, consider these challenges:

• National power shortages halted production and business operations at the country’s major mining companies.

• Consumer inflation excluding interest on mortgage bonds – the Reserve Bank’s measure for its inflation target – rose to 8.8% in January, up slightly from the 8.6% from December. That makes it the tenth consecutive month the so-called CPIX has clocked in above the 6% maximum target.

Yet, the Reserve Bank’s hands are tied on inflation, because lowering the country’s 11% key interest rate could allow market prices to race even higher.

It’s like the South Africa economy is a speeding car that rolled over as it crossed the finish line. The question becomes: Can it land on its wheels?

And the answer becomes more important as the country approaches 2010, the year the world converges on nine of South Africa’s cities for the month-long FIFA World Cup.

The impact that event will have on South Africa’s economy is much greater than the Summer Olympics will have on host China later this year. In South Africa, five new stadiums are currently being built for the event, and five more are being restored. Off the soccer field, the hosting cities have under way a variety of restoration projects totaling tens of millions of dollars.

That makes South Africa an interesting case study. Can the emerging economy and turnaround government prepare for the short-term festivities and cement the country’s long-term economic prospects? 

GDP Growth is Shrinking

It’s well known that South Africa is the world’s largest producer of platinum and its second-largest producer of gold. And reduced mine production played a significant role in the recent price spikes of each commodity.

However, its mining industry only contributes 5.8% of the country’s GDP. The real economic drivers are financial services, real estate and business services [19.6%]; manufacturing [16.3%]; and wholesale and retail trade/hotels and restaurants [14.1%].

And each of those industries underperformed in 2007.

A detailed report from Statistics South Africa shows that its financial, real estate and business services sector grew 8.5% in the fourth quarter, down from the 12.3% growth in the third. For the year, it grew 8.3%, compared to 8.6% in 2006.

Manufacturing surged 8.2% in the fourth quarter compared to a 2.5% decrease in the third. For the year, however, it grew only 3.9%, compared to 5.2% growth in 2006.

Wholesale and retail trade/hotels and restaurants grew only 2.1% in the fourth quarter, less than half of the 4.5% growth in the third. For the year, growth in the sector clocked in a 5%, drastically down from the 7% posted in 2006.

This is especially alarming because those core economic contributors are going down while the construction industry soared 18.1%, and when the smoke clears after the World Cup frenzy, there may be a lot of empty apartments, hotels, restaurants, businesses and airports.

Which is perhaps why economists were scratching their heads at the country’s 5.3% fourth-quarter growth.

Foreign Investors are Confident

Make no mistake, South Africa is one of the continent’s major economies and an emerging market over which many investors are salivating.

And though internal economic figures may be slipping, the country has its abundance of foreign investment to thank for its growth. For proof, look no further than the $5.4 billion that China’s state-owned Industrial and Commercial Bank of China Ltd. doled out for a 20% stake in Africa’s largest bank, Standard Bank Group Ltd., which is based in South Africa. 

Also, the country’s high interest rate makes its currency – the rand – an attractive investment for currency traders. 

South Africa’s 5.3% growth is "an exceptional number," Russell Lamberti, an economist at Econometrix Treasury Management Ltd., in Johannesburg, told Bloomberg News.  "This is evidence that investment spending is really a strong driver of growth."

Investors can tap this growth, too, and have a variety of options that cater to all levels of risk.

If you like the long-term prospects for South Africa, the iShares MSCI South Africa Index Fund (EZA) has been a solid performer.

AngloGold Ashanti Ltd. (AU) is an attractive play if you don’t mind its excessive hedging and South African political risk. However, stay away from Harmony Gold Mining Co. (HMY), as it recently posted its third-straight quarterly loss and forecast lower production for the quarter ended March 31, 2008.

Instead of investing in mining companies, investors are probably better off buying gold and platinum, both of which are sitting near record highs.

News and Related Story Links:

• Bloomberg:
  South African Growth Unexpectedly Accelerates to 5.3%

• Money Morning:
  South Africa’s Power Problems Send Commodity Prices Soaring

• iAfrica:
  Inflation Yet to Peak

• Wikipedia:
  2010 World Cup

• Statistics South Africa:
  Gross Domestic Product, 4th Quarter 2007

• Money Morning:
  South Africa’s 4.7% 3Q Economic Growth Raises Questions About the Country’s Prospects

As the market continues to struggle, gold and platinum have been proving their worth as investment hedges.

The price of platinum extended its record run yesterday [Thursday], climbing to $1,851.50 an ounce in early morning trading in London, Thomson Financial reported. It stood at $1,841, up $22 at 11:00 a.m. in New York.

Gold came along for the ride as it climbed $7.50 to $912.50 an ounce at midday. Gold has soared by almost $300 since credit markets began deteriorating last summer. It set a record of $936.60 an ounce last Friday.

Prices received a charge over the past two weeks as power shortages in South Africa forced mining companies to curtail energy usage by at least 10%.

"The platinum price has been driven to record levels by flooding and power shortages in [South Africa]. This has seen strong investor buying," Tom Kendall, precious metals strategist at Mitsubishi Corp. told Business Day.

South Africa provides four-fifths of the world’s platinum, and is second only to China in gold production.

"It’s premature to say at this stage what the production consequences of operating within 90% power constraint is," Trevor Raymond, spokesman for Anglo Platinum (OTC: AGPPY) said earlier this week. Anglo is one of the world’s largest platinum producers.

Anglo Platinum recently said output at its Amandelbult mine was diminished by flooding, and it may be three months before it comes back on line.  The mine could lose 50,000 to 70,000 ounces of production, an amount comparable to four days worth of world supply.

"It’s kind of a perfect storm," Wolfgang Wrzesniok-Rossbach told Bloomberg News. "There are absolutely no platinum reserves, so any supply disruption will have an impact."

Some experts believe the annual deficit could climb as high as 400,000 ounces, which would drive the price of platinum beyond $2,000 an ounce for the first time.

News and Related Story Links:

• Thomson Financial:
  Metals – Platinum hits record high on supply fears; gold dragged higher

• Bloomberg:
  Gold, Platinum Rise to Records as Mines Close; Crude Oil Gains

• Business Day:
  South Africa: Power Crisis Fires Up Platinum, Coal Prices

• Money Morning:
  Feng Shui or Fundamental Analysis? Seven Ways to Profit From Either Strategy

• Money Morning:
  South Africa’s Power Problems Send Commodity Prices Soaring

After three months of interviewing dozens of candidates, board members of Harmony Gold Mining Co. (HMY) have unanimously elected Graham Briggs as the South African miner’s chief executive officer.

The arduous selection process began in October when a four-person selection panel tapped an executive search company to help find the best candidate. Thirty-six other candidates were reportedly interviewed for the job.

The list was whittled down to four before selecting Briggs, 51, who had already been serving as acting CEO since Bernard Swanepoel resigned in August, when the company forecast a loss for the quarter ended June 30, 2007.

Briggs begins his new/old job immediately.

"He has been overseeing the introduction of the Harmony ‘back to basics’ management style and has done a great job," Harmony Chairman Patrice Motsepe said in a statement. "Harmony is on its way to being the globally competitive and profitable company that we know it can be."

Harmony is the third-largest gold producer in South Africa and is the fifth largest in the world.

Briggs has a 13-year tenure with Harmony, beginning with his first post as a manager of new business in 1995. In 2005, he was promoted to CEO of Harmony Australia and regional manager for Australiasia.

Harmony is hoping its new CEO ushers in a new and better year. In 2007, in addition to having its CEO depart and posting the quarterly loss, Harmony also made headlines for a mining accident that trapped more than 3,200 miners underground.

Although all the miners escaped death, the firm was vilified for allegedly cutting corners of safety.

On top of that, gold production in South Africa – the world’s second-largest gold source – continued its decline, forcing companies with mines to drive up production costs by digging deeper. And above ground, the South African rand appreciated significantly in 2007, biting off a large piece of gold’s 25% gain in value last year.

All That’s Gold Doesn’t Glitter

As the turmoil at Harmony reaffirms, investors should not walk into any gold investment blindly, or think that a gold mining company’s stock is the best way to profit from gold’s metoric rise in the past several years.

Viewed as a hedge, and purchased at the right time, gold will provide a sound addition to many investment portfolios. And if the yellow metal also manages to produce massive gains, even better.

All that said, though, there are gold investments that combine both safety and performance.

The StreetTracks Gold ETF (GLD) offers bullion-based pricing without the storage problems and liability of delivery.

Another possibility is the Prudent Global Income Fund (PSAFX). While it’s not a gold investment per se, it gives you exactly what gold investors look for – protection against a falling dollar.

Shares prices of Toronto-based gold-mining company Barrick Gold Corp. (ABX) – the biggest gold producer in the world – performed about in line with gold itself during 2007. But be wary of mining companies. They face the same inflationary pressures that everybody else does. And gold bugs aren’t inherent risk-takers.

If you are looking for gains that accurately – and safely – track the price of gold, another possibility worth a look is a pooled precious metals account, where you can buy gold and silver for as low as 1% above market price, while reaping the benefit of storage and maintenance fees that are lowered by spreading the costs across a pool of investors.

Editor’s Note: Associate Editor Mike Caggeso, who covers gold and commodities for Money Morning, recently wrote about gold’s prospects in the New Year as part of our  "Outlook 2008" series, which looks at global investing opportunities for the year ahead. To read that report, which is free of charge, please click here.

News and Related Story Links:

• Forbes:
  Can Briggs Bring Harmony to Gold?

• Reuters:
  Graham Briggs Bio

• Money Morning Investment Analysis:
  Outlook 2008: Gold Investments Will Continue to Glitter in the New Year.

• Forbes.com:
  Critics Dig at Harmony Gold.

Platinum futures spiked to $1,466 an ounce yesterday [Tuesday] as 270,000 South African miners declared a one-day strike protesting the safety record of the country’s mining companies.

Leaders from the National Union of Mineworkers (NUM) estimated 40,000 members marched in front of the Johannesburg Chamber of Mines, CNN reports.

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Nearly one miner dies every day in South Africa, but these latest protests were brought about by an October accident that temporarily trapped 3,200 Harmony Gold miners underground for two days.

Both sides agree that safety must be improved. However, there are trust issues.

"The industry made a lot of empty commitments, and the fatality rates are forever rising to the stars… employers need to take a leadership role and invest in safety the same way they invest in production," Erick Gcilitshana, NUM head of safety and health, told the BBC.

Even a work stoppage of one day will do noticeable damage to the South African economy, as 16% of the nation’s GDP is produced by mining and related activities.

The pressure is great to come to an agreement. However, NUM leaders have made it clear they will not shy away from a larger demonstration of their displeasure.

"If the big companies do not do anything to improve safety, we will be back on the streets again, we will stop the mines with a two or three months strike," Lesiba Seshoka, spokesman for the NUM, said at a rally of miners.

If the disagreements between the two sides escalate, world commodity prices would likely be affected. South Africa produces 11% of the world’s gold, and approximately 80% of the world’s platinum. 

Platinum, especially, would skyrocket, as there are no major aboveground supplies of the metal, and few alternate mining sources.

Both sides are hopeful it won’t come to that.

"We share these [safety] concerns with the union," Frans Barker, a senior Chamber of Mines official, told the BBC. "We’ve agreed with the union that they will go on this work-stoppage, in exchange for which the parties will sit down in the next few weeks and months.  And we’re going to jointly work out action plans and pledges to address the issue of safety."

There will be many groups rooting for a swift and equitable solution. Beyond the needs of gold- and platinum-reliant industries and the physical and economic health of the individual workers, any major stoppage would deal a serious blow to South Africa, and by extension, noticeably slow the entire African continent.

Since January, platinum prices have jumped more than 27%.

News and Related Story Links:

• CNN:
  Miners On Strike Over Death Toll

• BBC:
  S. African Miners Strike On Safety

• Reuters:
  S. Africa Miners Strike Hits Output, Platinum Price Up

• Money Morning:
  China Drills Into Africa With $5.4 Billion Investment

South Africa’s economy grew at an unexpectedly brisk 4.7% clip in the third quarter, driven by a 12.5% growth in the finance, real estate and business service industries from last year, a detailed report from Statistics South Africa said yesterday (Tuesday).

The economy’s third quarter performance was a marked improvement over the revised 4.4% advance in the second quarter, and was well ahead of the consensus prediction for 4.1% growth, according to a survey of 19 economists polled by Bloomberg News.

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Even so, the results seemed to prompt more questions than answers, some observers say.

"It’s very positive to see growth remaining so robust," Russel Lamberti, an economist at Econometrix Treasury Management in Johannesburg, told Bloomberg. "But I’m not happy with the manufacturing sector. We are not creating the kind of growth we want to see in this economy."

Lamberti isn’t the only one upset by the statistics. On the surface, an advance of 4.7% in gross domestic product (GDP) is pretty good for small economy that’s struggling to assert itself. But, in addition to manufacturing, other industries – agriculture, retail, hotel and restaurants, and transportation and communication – saw their third-quarter growth rates slow.

According to AllAfrica.com, South African Reserve Bank figures show that the country’s 10.5% interest rate [raised six times in the past 14 months] is starting to weaken economic growth, citing declining vehicle sales, fewer residential building plans and the narrow measure of money supply in September. Meanwhile, the South African rand has appreciated almost 12% on the dollar, weakening its revenues from exports.

"There is accumulating evidence of things looking weaker in the economy," Dennis Dykes, chief economist at South Africa’s Nedbank Group Ltd. (NDBKY), told AllAfrica.com. "The signal has filtered through to the consumer."

South Africa is the host of the 2010 FIFA World Cup, and the government has increased spending on railways, power production and distribution, and stadium venues to prepare for the competitive event. All totaled, the government is spending $68.8 billion on infrastructure over the next three years, which it hopes to will make up for the slowdowns in other areas of the economy.

However, if growth continues to wane, South Africa will be left with underutilized stadiums, railways and hotels built specifically for the World Cup.

Should that happen, it would end up as the ultimate economic irony: A long-term investment solves short-term woes, but end up as white elephants that weigh the economy down in the long run.

However, if you like the long-term prospects for South Africa, the iShares MSCI South Africa Index Fund (EZA) has been a solid performer.

News and Related Story Links:

• Statistics South Africa:
  Gross Domestic Product, 3rd Quarter 2007
  
• Bloomberg News:
  South African Growth Unexpectedly Accelerates to 4.7%.

• allAfrica.com:
  South Africa: Rate Hikes ‘Taking a Toll on Growth’.

• BBC:
  World Cup to kick off SA Economy.

• South African Reserve Bank.
• Home Page:
  2010 FIFA World Cup.