South Africa’s sovereign rating was cut one level by Standard & Poor’s, which cited concern that a wave of strikes in the mining industry is causing political and social unrest and placing pressure on government spending.
S&P lowered the rating of the continent’s biggest economy by to BBB, in line with Brazil, Russia and Mexico, with a negative outlook, according to a statement today. The rand fell 1.2 percent to 8.7621 per dollar, posting the biggest drop among 25 emerging-market currencies tracked by Bloomberg, as of 7:42 p.m. in Johannesburg.
“This is a bit of a game changer,” Dawie Roodt, chairman of of Efficient Group in Pretoria, said in a phone interview. “This is really, really bad news. We are being punished, and rightfully so, for weak leadership and political uncertainty.”‘
S&P’s cut comes about two weeks after Moody’s Investors Service reduced the nation’s debt ratings for the first time since apartheid to Baa1. S&P’s rating is two levels above junk and one level below the Moody’s assessment.
The strikes began at Lonmin Plc (LMI)’s Marikana platinum mine on Aug. 10 and spread to operations owned by Anglo American Platinum Ltd. (AMS) The country’s gold mines, including those of AngloGold Ashanti Ltd. (AU), Gold Fields (GFI) and Harmony Gold Mining Co. (HAR), have also been affected. A strike by more than 20,000 truck drivers resulted in food and fuel shortages in some parts of the country.
“The strikes in South Africa’s mining sector will likely feed into the political debate in the run-up to the 2014 elections, which may increase uncertainties related to the African National Congress’ future policy framework,” S&P said. “We also expect that South Africa’s underlying social tensions will increase spending pressures and reduce fiscal flexibility for the government.”
Yields on South Africa’s benchmark 6.75 percent bonds due 2021 fell seven basis points, or 0.07 percentage point, to 6.73 percent before the announcement. Five-year credit-default swaps lost almost six basis points to 157. The contracts pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.
South Africa’s gross domestic production will soften “not more than” 2.5 percent this year and the current account deficit will rise to at least 5.1 percent of GDP, the ratings company said. Growth will expand 3 percent in 2013, the rating company said.
The nation’s economic outlook is deteriorating “rapidly,” Reserve Bank Governor Gill Marcus said on Oct. 10. Manufacturing, which makes up 15 percent of the economy, contracted 1 percent in the second quarter as a debt crisis in Europe cuts demand for exports. The Treasury said in an e-mailed statement today that its fiscal plan “is realistic and achievable.” There’s “no historical evidence” to support S&P’s assessment that social tensions in the country will increase pressure on government spending, the Treasury said.
The rating cut “is going to then further weaken the foreign account and the rand, which means that inflation is going to be higher than people had foreseen,” Mike Schussler, chief economist at Economists.co.za, a Johannesburg- based advisory service, said by phone.
Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for S&P. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.
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