South Africa’s Mining Strikes a Risk to Financial Stability

Violent labor strikes that have left more than 40 people dead are threatening South Africa’s financial stability, the central bank said.

“These events received broad media coverage locally and abroad and impacted negatively on investor perceptions and are presenting risks to the stability of the financial system,” the Reserve Bank said in its Financial Stability Review released today in Pretoria, the capital.

Strike action began on Aug. 10 at Lonmin Plc’s Marikana platinum mining complex and spread to companies including Gold Fields Ltd., AngloGold Ashanti Ltd., Kumba Iron Ore Ltd. and Anglo American Platinum Ltd., the world’s largest producer of the metal. In the past two months, companies have fired workers, the rand has weakened and the country’s credit rating has been downgraded by Moody’s Investors Service and Standard & Poor’s.

South African lenders, which the central bank said remain well-capitalized, increased the proportion of credit they were lending to mining companies to 3.73 percent in the second quarter from 3.67 percent in the previous three months, according to the SARB report. Standard Bank Group Ltd. and Nedbank Group Ltd. are the largest lenders to mining companies, according to Greg Saffy, Johannesburg-based RMB Morgan Stanley’s banks analyst.

A recovery in global risk appetite boosted demand for South African bonds, according to the central bank. From mid-August debt markets became “vulnerable to domestic socio-economic concerns, which garnered renewed foreign investor concerns following labor unrest,” it said.

Rand Underperforms

The rand has “underperformed compared to the currencies of most emerging-market economies” because of the strikes, and would have been supported by foreign bond purchases related to the nation’s inclusion in Citigroup Inc.’s World Government Bond Index, the Reserve Bank said.

The rand has weakened 6.8 percent against the dollar in the past month, the world’s performer, according to data compiled by Bloomberg. It lost 0.3 percent to 8.7930 at 12:50 p.m. in Johannesburg.

“Much-needed corporate-sector investment to expand future capacity was lacking during the period under review,” the Reserve Bank said, while business and consumer confidence has mostly declined. “Confidence in the financial services sector remained high but has still not reached its pre-crisis levels.”

Consumer Confidence

While consumer confidence may be waning, the appetite for household debt appears to be on the increase, according to Lesetja Kganyago, deputy governor of the Reserve Bank, who spoke today at a presentation on the Financial Stability Review in Pretoria. At the same time, more consumers are going into arrears on their loan repayments, the central bank said.

The mining strikes came at a time when South Africa’s growth was slowing, unemployment was still the highest of the countries measured by Bloomberg, and bad debts at some of the banks, including Standard Bank and Absa Group Ltd., were on the rise. Any worsening of those indicators will curb the banks’ ability to fund economic expansion.

“Although there are challenges, South Africa is generally sound,” Kganyago said. Through the 2008 global financial crisis and since, the banking system has managed to remain “resilient,” he said.

South Africa is going ahead with plans to implement the Basel III banking regulations, starting from January next year, the central bank said. South Africa needs “urgent” clarity from the Basel Committee on the so-called liquidity coverage ratio and the way in which “highly liquid assets” can be recognized and defined, the bank said.

If South African banks were to need a bailout or their capital dropped below required liquidity levels, a committed facility will be available from January 2013, according to the Reserve Bank.

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