Fitch believes impact of unrest on South Africa’s sovereign rating will be limited

Big Three credit ratings agency Fitch sees the violence that has engulfed South Africa over the past week as a temporary glitch that will not have a direct impact on the country’s economic growth prospects and debt score, the latter languishing deep in “junk” territory. However, the agency warned that the unrest would ramp up factional tensions in the governing ANC.

Fitch, along with fellow ratings agency Moody’s, slashed the country’s credit rating in November as the country reported a gaping hole in the budget and higher debt levels. That brought South Africa’s rating to BB-, with a negative outlook. 

However, in May Fitch kept the credit status unchanged, and has now upgraded its 2021 growth forecast to 4.9%, from 4.2% earlier, citing better-than-expected revenue collections driven by the upswing in commodity prices that soothed South Africa’s budget deficit and fattened the current account surplus.      

“Fitch Ratings believes that the direct economic impact of riots in South Africa following the arrest of former president Jacob Zuma will be limited for the sovereign’s creditworthiness,” said the rating’s firm.  

“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,” Fitch added. 

The violence around the country that has seen the ransacking of shopping malls, factories and other businesses — many burnt to ashes — as well as the destruction of key rail and road infrastructure, began last Friday in KwaZulu-Natal but soon spread to the economic heartland of Gauteng and other provinces. 

Retailers and business associations have warned of fuel and food shortages, and the country’s exports are likely to take a massive hit with roads inaccessible to the cargo trucks that transport the majority of goods, and ports on the Indian Ocean coastline closed due to the violence.   

While authorities have yet to definitively finger the source of the violence, many have linked it to the long-standing infighting in the ANC between factions linked to Zuma and his successor President Cyril Ramaphosa, which came to a head with the former president’s arrest last Thursday. Growing levels of poverty and unemployment have also been cited as sources of the unrest. 

“Our base case is that these will continue to complicate President Cyril Ramaphosa’s efforts to muster support for his policies. However, there is a small risk that a faction of Mr Zuma’s allies breaks from the ANC, having already suffered the suspension of its most prominent current leader, Ace Magashule, from his role as ANC secretary-general in May,” said Fitch. DM/BM