Labour unrest, unemployment threaten SA financial stability

Labour unrest and unemployment threaten South Africa's financial stability, according to a SA Reserve Bank report released on Tuesday.

The September 2013 Financial Stability Review, which focuses on the first six months of the year, found that weak economic performance and labour unrest threatened the outlook for South Africa's sovereign credit rating.

"The performance of the South African economy in the near future, the speed of the intended fiscal consolidation in the next fiscal year, and the occurrence and impact of labour disputes would be critical factors in determining South Africa's credit rating," the report says.

"Further downgrades could trigger a negative reaction from investors, especially since it might bring South Africa's credit rating closer to the benchmark that Citibank uses to exclude countries from its World Government Bond Index (WGBI)."

Once a country is included in the WGBI, its performance is monitored and any country whose rating falls below BBB- according to Standard & Poor's (S&P) or a Baa3 rating according to Moody's, could be removed from the next month's profile.

South Africa has negative outlooks from both S&P and Moody's. Its current credit rating with S&P is BBB and its rating with Moody's is Baa1.

"Given the extent of non-resident investors' holdings of South Africa's sovereign debt and the estimated amount of capital inflows to South Africa attributable to its inclusion in the WGBI, further credit-rating downgrades could have far-reaching implications.

"Whereas some passive investors are likely to maintain their exposure to South Africa, more active investors may reconsider their portfolio exposures."

The report found that South Africa's unemployment rate increased during the period under review and reached 25.6 percent in the second quarter of 2013. This brought the total number of unemployed to 4.72 million.

"Of particular concern is the increase in the youth unemployment rate, which amounted to 52.8 percent in the second quarter of 2013," the report says.

"Current labour disputes, coupled with the sluggish economic growth outlook, could further dampen employment creation."

It found the rand was being pressured by "protracted industrial protests", lower commodity prices, concerns about financing the country's budget, market fears that South Africa might suffer another credit-rating downgrade, and the delay in electricity generation at Eskom's Medupi power plant.

"South Africa's ability to resolve domestic issues may continue to hold significant implications for the future of the rand's exchange value."