S&P: SA’s social unrest is a reminder of constraints to a fragile recovery

By S&P Global Ratings

This report does not constitute a rating action.

Widespread civil unrest centered on KwaZulu-Natal and Gauteng provinces has left several businesses and supply chains in South Africa in disarray. S&P Global Ratings does not expect immediate rating actions, but that doesn’t rule out a weakening of corporate credit quality in the next few years. Although order has been largely restored, with a slow resumption of supply chains, we believe the damage to elements of the country’s retail and financial infrastructure, economy, and consumer and investor confidence will take longer to repair. If the unrest is repeated or prolonged, this could pose risks to ratings.

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.

Although the impact on insurers is likely to be relatively low because policies typically do not cover political violence, we anticipate potentially softer revenue growth in the longer term. For banks, operating risks are likely to be broadly manageable despite damage to branches and ATMs.

Regarding sovereign creditworthiness, the unrest highlights institutional weaknesses and will hinder growth, but the low base from 2020 and strong commodity prices should continue to support GDP growth this year, although fiscal and structural pressures will persist.