UPDATE 2-Weak economy, strikes put S.Africa foreign bond buying at risk-cenbank
* $6 bln capital inflows since inclusion in WGBI
* Unsecured credit exposure up 6 pct
* Amnesty for bad credit records could choke credit (Adds details, quotes)
By Helen Nyambura-Mwaura
PRETORIA, Oct 29 (Reuters) - South Africa's stuttering economy and frequent strikes may lead to further sovereign rating downgrades and the exclusion of its bond market from the Citibank global bond index, the country's central bank said on Tuesday.
Foreign investors hold about 37 percent of government debt, the Reserve Bank said in its regular Financial Stability Review.
"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)."
South Africa's bond market has received 60 billion rand ($6.1 billion) in inflows since joining the influential index in October last year. Inclusion in the index - tracked by an estimated $2 trillion worth of funds - is viewed as a seal of approval for Africa's biggest economy.
But a spate of strikes in the bellwether mining and auto sectors has hit economic growth prospects while a pullback in unsecured lending has hurt consumer spending.
The Reserve Bank also said closer monitoring of non-banking credit providers, also known as shadow banking, was necessary because of the liquidity and credit risks they posed to the wider financial system.
A segment the Reserve Bank calls Other Financial Intermediaries - including both regulated financial institutions and shadow banking companies - makes up 22 percent of total financial assets and less than 10 percent of total credit extended.
The central bank said the banking sector's total gross credit exposure grew by 9.8 percent in the year to June 2013 while impaired advances, or bad debts, fell 2.3 percent, a smaller contraction compared to the 10.9 percent in the previous period.
Total unsecured credit exposure expanded 6.3 percent to 468.7 billion rand in July from 441 billion in December 2012, most of it was in credit cards and overdraft facilities.
South African legislators want credit bureaux to remove some names of people with bad records from their books, especially for those that have already paid up, to free them up to take out fresh loans. The move has been criticised as a government ploy to win votes at elections in 2014.
Reserve Bank Deputy Governor Lesetja Kganyago said the proposal could have the effect of forcing banks to tighten lending. "Amnesties lead to other amnesties. You have an amnesty now and a few years down the line people will ask, 'Give me some more'," he said at a presentation of the report.
"If we are not careful, we will find that we actually choke the flow of credit into the real sector of the economy at the time when everybody else in the world is struggling to get credit flowing." ($1 = 9.8335 South African rand) (Editing by Tiisetso Motsoeneng and Ed Stoddard/Mark Heinrich)
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