LABOUR unrest in the mining sector is spooking foreign investors and could prompt a sovereign credit rating downgrade for South Africa, analysts say.
The killing of 34 striking mineworkers by police at Lonmin’s Marikana platinum mine this month triggered a sell-off of domestic bonds by foreign investors, and weakened the rand.
Two of the three top global rating agencies said on Friday that the events highlighted the social challenges they had already flagged as a key concern when they decided to put a negative outlook on South Africa’s credit ratings.
"If we continue to see a lot of unrest, destruction and instability … it would certainly put us in a position where we would have to think very hard about what the rating implications are," said Konrad Reuss, MD of Standard & Poor’s (S&P) in South Africa and Southern Africa.
Credit ratings help determine a country’s cost of borrowing and affect investor appetite for local assets, as well as interest in funding new projects.
S&P revised the outlook on its BBB+ sovereign credit rating for South Africa to negative from stable in March, citing policy risks linked to high unemployment, inequality and other social problems.
On Friday, Fitch Ratings said the Marikana protests highlighted "broader structural problems that have long weighed on South Africa’s credit rating". It changed the outlook for its BBB+ rating to negative from stable in January.
"The latest protests are a setback for South Africa’s mining sector, which has been struggling since the early 2000s," it said. Rising costs, political and policy uncertainty and talk of nationalising mines have made South Africa "a less favourable investment destination compared with its peers", Fitch said.
South Africa’s mining sector comprises just 5% of the economy’s overall output, but accounts for a major chunk of its foreign exchange earnings and about 40% of the market capitalisation of the JSE.
Mining output shrank by nearly 17% in the first quarter, mainly due to an illegal strike at Impala Platinum, the second biggest platinum producer.
"What this all highlights is the toxic relationship between business, unions and government and our inability to move beyond that point," Nedbank economist Nicky Weimar said. "This makes it hard for foreigners to judge whether business in South Africa will be successful."
Nomura International economist Peter Attard Montalto said the events at Marikana were part of a much larger "social and political" shift in South Africa that reflected conflict between different political, social and ideological groups.
More widespread illegal labour action combined with more interventionist government policies agreed at the electoral conference of the African National Congress in December "would all increase the likelihood" of a credit rating downgrade, he said.
Mr Reuss said any action on South Africa’s ratings would "depend on how the situation continues".