Ratings agency Standard & Poors (S&P) Global Ratings does not expect to take any immediate rating actions in the wake of the mid-July civil unrest that affected KwaZulu-Natal and parts of Gauteng.

The unrest, which included widespread looting, violence, vandalism, and loss and damage of stock, left many businesses and supply chains in affected areas in disarray, and S&P says the situation does not rule out a weakening of corporate credit quality in the next few years.

The firm adds that a repeat of the unrest could pose risks to ratings.

Although order has been largely restored, S&P reports that, with a slow resumption of supply chains, it believes the damage to elements of South Africa’s retail and financial infrastructure, economy, and consumer and investor confidence will take longer to repair.

S&P estimates that the civil unrest will likely shave about 0.7% off of South Africa’s headline gross domestic product (GDP) growth this year, impact private consumption and slow the pace of economic recovery.

Nevertheless, S&P expects strong commodity prices and the base effect from the contraction in 2020 to continue supporting the country’s GDP growth.

S&P notes that South Africa’s economy contracted by 7% in 2020, the sharpest drop since the 2009 recession, largely owing to the Covid-19 pandemic.

This year, despite the civil unrest, S&P notes that 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, S&P currently forecasts 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 and 2024.

However, the firm says 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.

FUTURE & BANKING SECTOR

Beyond this year, S&P reports that 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 – the latter case requiring S&P to assess whether there are implications for cash flow generation, capital expenditure decisions, and ability to raise external funding.

In terms of the banking sector, S&P says the unrest impacted hundreds of South African bank branches, while many automated teller machines (ATMs) were vandalised.

As a result, access to cash was hampered in some areas, with the firm estimating that less than 5% of the national ATM infrastructure was damaged.

However, S&P explains that ATMs and bank branches are critical to distribute social grants and conduct daily transactions, thereby leading to the firm suggesting South African banks focus on efforts to move away from a cash economy as South African banks continue their digital transformation.

“We believe digital banking solutions will not only help large banks reduce costs, but also risks to their physical infrastructure,” S&P says in a statement.