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Social Unrest In South Africa Is A Reminder Of Institutional And Structural Constraints To A Fragile Recovery

This report does not constitute a rating action.

Acute civil unrest in some parts of South Africa has disrupted the operations of some retailers and supply chains. Although order has been largely restored, with a slow resumption of supply chains, S&P Global Ratings believes the damage to elements of the country's retail and financial infrastructure, economy, and consumer and investor confidence will take longer to repair.

From about July 9, 2021, civil unrest gained momentum in selected provinces of South Africa following the arrest of the former president, Jacob Zuma. The KwaZulu-Natal (KZN) and Gauteng provinces experienced widespread looting and arson, which resulted in damage to or destruction of selected retail outlets, manufacturing facilities, and infrastructure, including banking infrastructure, and regrettable loss of over 300 lives. Unrest also severely hampered supply chains due to blocked road and rail transportation corridors, particularly on links between the country's inland economic hub and KZN-based ports.

In our June 29 article, "Credit Conditions Emerging Markets Q3 2021: Slow Vaccination Prevents A Robust Recovery," we noted that we see the risk level of social unrest in emerging markets as elevated and worsening. Specifically, we highlighted that wide income inequality, increasing poverty levels, and poor access to health services are spurring social unrest. The civil unrest in South Africa is a clear example of this risk.

Sovereign: Growth Can Recover If There's No Resurgence Of Unrest

It is estimated that the unrest will likely shave about 0.7% off headline GDP growth in 2021, hit private consumption, and slow the pace of economic recovery. Nevertheless, we expect that strong commodity prices and the base effect from the contraction in 2020 will continue to support GDP growth. If the unrest were to recur and last for a long time, this would further pressure the economy and potentially stifle the rebound.

Following past years of weakening state institutions, the current administration and the courts tried to strengthen various institutions--such as the tax revenue authority (South African Revenue Service), state-owned enterprises, and the national prosecutions authority--and pursue accountability. This eventually led the courts to order the arrest of former President Zuma, which triggered the unrest against a backdrop of the pandemic, high unemployment, and high inequality of incomes.

South Africa's economy contracted 7% in 2020, the sharpest drop since the 2009 recession, largely due to the pandemic. In 2021, despite the unrest, international commodity prices have rebounded, supported by greater global demand, helping an improvement in 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.

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 labor market, with heavy unionization across the public and private sectors.

Our sovereign ratings have been constrained by weak economic growth performance since well before the COVID-19 pandemic, particularly on a per capita basis; high economic inequality; as well as weak public finances, including high fiscal deficits, a high debt burden, and sizable contingent liabilities from weak state-owned enterprises. The ratings continue to be supported by the country's monetary and exchange rate flexibility and credible monetary policy, a well-capitalized and regulated financial sector, and relatively deep capital markets, alongside moderate external debt--in particular low external debt denominated in foreign currency.

Corporates: No Immediate Risk To Credit Ratings From Recent Unrest

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. Few of the corporate issuers we rate have been completely unaffected by the unrest and its aftermath, but we currently do not view the impact as severe. 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 we have conservative forecasts for the post-COVID-19 recoveries of South African corporates, which include financial headroom for potential further pressure on cash flow. All things being equal, we expect leverage through 2021 will largely remain on the same path that we traced in our June 16 article, "The Pandemic’s Fallout And Existing Challenges Restrain Sub-Saharan Africa’s Recovery."


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. 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.

The effect on corporates varies depending on industry sector, geographic location, and dependence on supply chains in or through KZN. But regardless of where their operations are based, almost all companies are likely to have experienced issues related to the import of goods, export of production, and relatively short-lived shortages of items such as fuel. That's following a shutdown of South Africa's largest refinery, which is based in KZN, amid fears of facility damage and sabotage to the KZN-Gauteng pipeline infrastructure.

Some companies are more exposed than others by virtue of their operational focus or geographic location. For example, corporates with a presence in retail centers and shopping malls (including retailers and mobile telecommunication providers) have experienced some degree of looting and property damage, which was more extensive in less affluent areas.

Companies with production facilities located in the affected provinces in some cases had to temporarily cease operations and deployment of capital spending to ensure the safety of their assets and workforce. Transportation companies have had operations severely curtailed in affected regions. Mining companies are mostly located outside of hotspots, but exports, especially of bulk commodities, have been disrupted, largely as a result of some rail and port operations having stalled for a period, with backlogs still being cleared. We understand that power and water infrastructure have experienced limited direct damage, but utilities' inability to undertake service or repairs in affected areas has led to the slow resolution of supply issues.

Insurance: The Main Impact Will Be On Business Growth

Insurers' earnings will probably not take a hit because policies typically do not cover political violence, which, however, could reduce future business growth. We expect the recent riots to have limited scope on earnings for South African property and casualty (P/C) insurers. We recognize that policies from many P/C carriers within South Africa typically do not cover riots and political violence. This type of coverage is offered by SASRIA, the SA Special Risks Insurance Association.

Initial industry loss estimates, or total direct claims, from recent events are wide ($1 billion-$3 billion provisionally), reflecting the difficulty in quantifying these claims at this early stage. As for the indirect costs to insurance companies from the events, that depends on whether they result in lower economic growth for South Africa, which time will tell. It is clear that a decline in economic growth could mean less business for the insurance sector.

Banking: Operating Risks Are Manageable Despite Damage To Physical Infrastructure

The unrest touched hundreds of South African bank branches, and many ATMs were vandalized. As a result, access to cash was hampered in some areas. We estimate that less than 5% of the national ATM infrastructure was damaged, and hundreds of branches remain closed. This infrastructure is critical to distribute social grants and conduct daily transactions.

The recent events point to two areas of focus for banks and the South African economy:

  • The need to move away from a cash economy as South African banks continue their digital transformation. We believe that digital banking solutions will not only help large banks reduce costs, but also risks to their physical infrastructure. Leading banks have embarked on technological transformation to improve efficiency and meet changing customer needs in response to increasing pressure on revenue. However, many people continue to rely on cash for their daily needs.
  • The need for more support to small and midsize enterprises (SMEs) that suffered losses. The South African rand 200 billion COVID-19 government guarantee scheme for SMEs did not have much uptake in 2020. Less than 20% of the first tranche was used in 2020 because domestic banks offered support to their clients before government introduced its support package to the economy. We expect banks to proceed the same way this time around.

It is still too early to assess the impact of the unrest on banks' credit portfolios and the extent to which they will revalue collateral. We understand the impact is likely to be uneven across regions because some areas were more affected than others, but disruptions in the main economic centers have been quelled rapidly.

That said, our ratings on banks are unlikely to be affected by the recent events since their stand-alone credit profiles are higher than our ratings, which remain constrained by the sovereign rating. In light of higher operational risk, we still expect earnings capacity to recover gradually to prepandemic levels only after 2022, on the back of resilient credit metrics once the pandemic subsides.

Related Research

Primary Credit Analysts:Omega M Collocott, Johannesburg + 27 11 214 4854;
Samira Mensah, Johannesburg + 27 11 214 4869;
Trevor Barsdorf, Johannesburg + 27 11 214 4852;
Ravi Bhatia, London + 44 20 7176 7113;

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