South Africa Credit-Rating Outlook Cut to Negative by S&P

South Africa’s credit-rating outlook was cut to negative by Standard & Poor’s because of slower economic growth and a risk the government may not be able to control spending to rein in the fiscal deficit. The rand dropped the most in almost a week.

The foreign-currency debt rating of BBB+ was affirmed and the outlook was reduced from stable, S&P said in an e-mailed statement today. The rating is the third-lowest investment grade and in line with Thailand, Kazakhstan and Ireland. Fitch Ratings and Moody’s Investors Service have lowered their outlooks since November.

“There are issues of public-sector wages that could increase going forward that could put pressure on fiscal planning,” Christian Esters, director in the Africa sovereign ratings team, said by phone from Frankfurt today. “There are some underlying risks, also related to gross domestic product growth.”

South African economic growth will slow to 2.7 percent this year, according to the government, as Europe falls into recession, reducing demand for manufactured goods from the continent’s largest economy. Job creation has lagged, keeping South Africa’s unemployment rate the highest of 61 nations tracked by Bloomberg.

“The South African government will continue to place higher economic growth and job creation at the core of its economic policy, within a transparent investment and sustainable fiscal framework,” Pretoria-based National Treasury said in an e-mailed statement. Reserve Bank spokesman Hlengani Mathebula didn’t return a message on his mobile phone.

Social Problems

The currency dropped as much as 1.4 percent, the most in two weeks, to 7.7089 per dollar, and was trading at 7.6890 by 7:37 p.m. in Johannesburg.

The Treasury forecast on Feb. 22 the budget deficit will narrow to 4.6 percent of gross domestic product in the fiscal year through March 2013 and 3 percent by 2015. It has estimated a lower-than-inflation increase in state-worker wages of 5 percent.

“Fundamental structural economic and social problems continue, such as very high unemployment and a structural current-account deficit that makes the economy dependent on external financing,” S&P said in a statement.

Fitch cut its outlook to negative on Jan. 13, citing slowing growth and job creation. Moody’s lowered the outlook Nov. 9 because of “heightened political risk” tied to the ruling African National Congress’s policy conference in June and its elective conference in December. Youth League President Julius Malema, who is appealing his expulsion from the party, led a campaign by the ANC’s Youth League for mines and banks to be nationalized.

‘Matches the Noises’

“Overall this action does make sense given the low potential growth of the country and the policy risks that are out there and hinted at in the ANC policy discussion documents,” Peter Attard Montalto, an economist at Nomura Plc in London, said in a note to clients. “The statement matches the noises that have been coming from them in recent months though it was not obvious they were on the cusp of a change.”

The nation’s borrowing costs rose, with the yield on the 10.5 percent local-currency bond due 2026 rising four basis points to 8.48 percent.

“We disagree with the assessment of the political risk in South Africa,” National Treasury said. “Political debate and a vigorous exchange of ideas on policy options are part and parcel of the fiber of a democratic dispensation. This cannot be construed as political instability.”

To contact the reporters on this story: Andres R. Martinez in Johannesburg at amartinez28@bloomberg.net; Franz Wild in Johannesburg at fwild@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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