South Africa’s week of unrest earlier in July could shave as much as 0.7% off the country’s headline GDP growth in 2021, impact consumer spending, and slow the pace of economic recovery, says S&P Ratings.

The credit ratings firm said in a research note on Monday (26 July), that despite this hit, South Africa is still likely to see some GDP growth (off a low base), thanks to strong commodity prices.

However, it cautioned that if the unrest were to recur, this would add further pressure to the economy and potentially stifle any rebound.

South Africa’s economy contracted 7% in 2020, the sharpest drop since the 2009 recession, due in main to the Covid-19 pandemic.

Despite the local unrest, international commodity prices have rebounded in 2021, supported by greater global demand, helping to improve South Africa’s terms of trade and GDP growth.

“Owing to this, and the base effects from the 2020 contraction, we currently forecast that South Africa’s economy will continue to recover and expand by 4.2% this year, before growth drops to 2.6% in 2022 and to about 1.5% on average in 2023-2024,” S&P said.

“Institutional and structural impediments will continue to weigh on medium-term growth, including the risk of further unrest, unreliable electricity supply, weak investment expenditure, and an inflexible labour market, with heavy unionisation across the public and private sectors.”

Unrest cannot resume 

“We do not see the recent social unrest as a driver of South African corporate credit ratings in the short term, but there could be longer-term implications,” S&P said.

“Based on the assumption that unrest does not resume in any meaningful way, we do not expect our cash flow and leverage metrics for rated South African corporates to weaken significantly.”

That’s partly because of S&P’s conservative forecasts for the post-Covid-19 recoveries of South African corporates, which include financial headroom for potential further pressure on cash flow.

“Beyond 2021, the effects on credit quality will depend on whether the recent civil unrest remains an isolated incident or signals a change in the risk of operating in South Africa,” it said.

“If the latter, we would need to assess whether there are implications for cash flow generation, capital expenditure decisions, and ability to raise external funding.”

Fitch and Moody’s

Fitch Ratings said earlier this month that the direct economic impact of the recent riots will be limited for the sovereign’s creditworthiness.

“However, the violence highlights tail risks to social and political stability and could affect fiscal policy, including public-sector wage negotiations, complicating efforts to stabilise the level of government debt/GDP,” it said.

Fitch said that the effects of the unrest on the economy should be temporary and are unlikely to affect South Africa’s rating which it affirmed at ‘BB-’ with a Negative Outlook in May 2021.

“In fact, the economy has performed better than expected – we revised our forecast for economic growth in 2021 to 4.9% in June, from 4.3% in our May review,” the ratings group said.

Moody’s forewarned in May, that low economic growth and rising debt burden in the country could see socioeconomic tension intensify and impede policy reforms.

The agency said that the country’s credit profile was balanced, with its low level of foreign currency debt and a strong core of institutions counting in its favour.

However, it warned that a number of growing fiscal and employment issues could lead to trouble. “Credit challenges include structurally very weak growth and a high government debt burden that will continue to rise without comprehensive economic and fiscal reforms,” Moody’s said.

“Socioeconomic inequalities also intensify tensions that drive political risk and complicate policy efforts.”

Last week, Moody’s downgraded five of South Africa’s largest metropolitan municipalities, citing concerns around liquidity and finances.

Moody’s said that the affected municipalities include:

  • The City of Ekurhuleni;
  • The City of Cape Town;
  • Nelson Mandela Metropolitan Municipality;
  • The City of Johannesburg;
  • The City of uMhlathuze (Richard’s Bay).

“The rating downgrades reflect rising liquidity pressure as a result of material shortfalls in revenue collection, that Moody’s expects to last, in the context of very weak growth,” the firm said.