South Africa’s central bank said that the weak economic performance and recurring labour market tensions in the country continue to threaten the outlook for its 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 bank said in its Financial Stability Review.

It added that possible credit rating 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). Any country with rating below Standard and Poor’s and Moody’s Investors’ BBB-/Baa3 could be removed from the index and moved to the Additional Market Indices.

Foreign investors hold about 37% of South Africa’s sovereign debt. In case of rating downgrade, the more active investors may reconsider their portfolio exposures, the bank review said. South Africa's bond market has received ZAR 60bn (EUR 4.4bn) in inflows since joining the WGBI index in October 2012.

The frequent strikes in the key mining and auto sectors has curbed South Africa’s economic growth prospects while a pullback in unsecured lending has hurt consumer spending, the bank also said. The review shows that the non-banking credit providers need a closer monitoring due to the liquidity and credit risks they pose to the wider financial system. “Nearly all the services that banks provide can also be provided by shadow banks, with the main exception being, specifically in the case of South Africa, taking deposits from the public,” the central bank said in the review.

Earlier in October, Fitch Ratings said that further downward revisions to growth forecasts highlight the increasingly difficult environment the South African government is facing in its efforts to keep a balance between fiscal prudence and counter-cyclical policy, as well as the economic and social challenges the authorities will face if growth remains weak. The statement followed a government announcement that it sees its budget deficit at 4.2% in the 2013/2014 fiscal year and plans to further reduce it to 3% in two years. In February, the deficit target was 4.6% of GDP, but was later lowered due to reduced costs and the technical effects of changing how it calculates the balance.

South Africa projected a GDP growth of 2.1% in 2013 and sees it increasing to 3.5% in 2016. The nominal inflation is seen at 5.9% in 2013 and is expected to remain within the targeted 3% to 6% in the next years. In September, the inflation was 6% y/y.

Moody's, Standard and Poor's and Fitch have all downgraded the rating of South Africa in the beginning of 2013 due to concerns about the government's institutional strength and the country’s investment climate and political stability.