However, the credit ratings agency said the riots highlight “tail risks to social and political stability and could affect fiscal policy .. complicating efforts to stabilise the level of government debt to GDP”.
In May, Fitch affirmed South Africa’s credit rating at BB- , three notches below the investment grade status, noting at the time that the rating “is constrained by high and rising government debt, low trend growth and exceptionally high inequality that will complicate consolidation efforts”.
This week, as the country grapples with civil unrest — characterised by indiscriminate vandalism and looting — Fitch has come out to temper fears of long-term economic effects.
“The ongoing unrest is affecting critical sectors such as transport, but we assume it will fade soon with only transitory macroeconomic effects,” Fitch said.
“Even if it escalates, the effects on the economy should be temporary, and are unlikely to affect South Africa’s rating … 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.”
Fitch noted that South Africa’s record on political stability is reasonable. This week’s violence is believed to have been started by supporters of Jacob Zuma in his home province of KwaZulu-Natal, who were angered by the former president’s incarceration for contempt of court.
However, Fitch said, “the violence underscores the risk that exceptionally high income inequality and unemployment could jeopardise social and political stability over the medium to long term”.
According to Statistics South Africa’s quarterly labour force survey, in the first three months of 2021 the unemployment rate reached 32.6%, the highest since the survey was launched in 2008. The unemployment rate under the expanded definition, which includes discouraged work-seekers or those who have given up looking for work altogether, paints an even more dire picture — increasing by 0.6 of a percentage point to 43.2% in the first quarter of 2021.
The crisis could also escalate long-standing tensions within the ANC, Fitch said. “Our base case is that these will continue to complicate President Cyril Ramaphosa’s efforts to muster support for his policies.”
The greater near-term risk, Fitch added, is that the country’s public finances could be further strained if the government reacts by easing fiscal policy. “The unrest could embolden public-sector trade unions in ongoing wage negotiations, while raising pressure on the government to accede to their demands to avoid damaging strikes, particularly just before the local elections in October.”
Fitch and other ratings agencies have red-flagged the mounting public sector wage bill, saying that failure to bring it under control could lead to future downgrades. In May, Fitch said the government’s fiscal consolidation plan relies heavily on containing public sector wages.
Last week the government tabled a new offer to public sector unions, which included a 1.5% increase. But it is not clear that the government’s current offer will satisfy the unions, Fitch noted, and “uncertainty about the key wage component within fiscal spending will linger if the wage agreement covers only one year”.
Fitch’s upward revision of South Africa’s 2021 economic growth forecast may provide some headroom to the public finances relative to its May assessment, the ratings agency said.
“However, an increase in wages that puts more strain on the budget than we currently expect could raise doubts about the feasibility of the government’s fiscal consolidation plans,” Fitch said.
“Moreover, the evolution of the Covid-19 pandemic could provide further challenges to the public finances in the months ahead — although the economic impact of the latest infection wave appears to have been manageable so far, even as the human cost has mounted.”