Currency expert Jack Crooks says South Africa risks becoming the most notorious failed state in the troubled continent. Falling commodity prices are hurting the mining industry. And social tensions continue to destabilize the political climate. Jack says the rand is hugely overvalued right now, making it a “currency crisis in the making”.

This from The Sovereign Society:

Put simply: If things don’t start improving quickly in South Africa, it’s poised to become the next – and perhaps most noteworthy – failed state in all of Africa. Think Zimbabwe, but multiply the chaos as South Africa has long been the best and last hope for Africans striving to build and maintain a modern and efficient market economy.

1. Global economies, most specifically emerging global economies, have been brought to a halt by declining levels of demand. South African resources are particularly exposed to demand destruction as the global recession spreads. Frozen credit markets have tied the hands of economies once turning heavily to South Africa for its natural resource production.

Declining commodity prices alone will certainly send tremors throughout South Africa. Accessibility of credit will put a damper on new South African projects, and sharply lower commodity prices will make such projects increasingly less profitable.

This ultimately means a severe drop off of capital inflows. Up until this point, South Africa’s appealing growth story was still in its infancy.

The country made hay off the commodity bull market and South Africa’s currency is stamped with a fairly attractive yield. But the collapsing global financial system will stop South African growth dead in its tracks. At that point we’ll learn just how improved the booming global economy allowed South Africa to become.

Unfortunately, there are plenty of pieces that still don’t fit together. To that point…

2. Political and social unrest has frequented the African continent. Though South Africa is considered a democracy, it’s effectively a one-party state ruled by the African National Congress (ANC). Political and social pressures are quickly encroaching.

The ANC is a Marxist-like organization that has aggressive redistribution policies. It has instituted a draconian affirmative action program to increase black employment. But this has led to massive incompetency in key sectors of the economy and a “brain drain” out of South Africa.

The reality is, unemployment for many black workers in the townships has not improved much at all. And these efforts to empower more nonwhites will likely unwind dramatically as the economy deteriorates like it did a decade ago.

In fact, life of squalor and poverty for many South Africans has gotten worse over the past several years. Social stability has spiraled downward and crime is rampant throughout all levels of society. But because the poor don’t have the wherewithal to hire private guards, they are victimized repeatedly by roving gangs of thugs. It is a sad awful existence that has not improved despite the ANC guaranteeing it would.

And as the business cycle turns down, we expect the ANC to try to ramp-up its efforts to redistribute wealth in an attempt to damper rising social unrest. The impact of which will only hollow out South Africa’s economy even more, further weakening what once was a vibrant and efficient economy.

Given these items, we think the South African rand is extremely overvalued. It represents a crisis currency in the making. This is truly big game territory. For when the market finally recognizes this country’s deep and profound economic, political and structural problems, South Africa’s currency will face a world of pain.

Source: Markets Sink Again, and Best Opportunities Still Reside on the Short Side…