South Africa Downgraded by Fitch as Strikes Hurt Growth

South Africa’s credit rating was cut to the second-lowest investment grade by Fitch Ratings because of slowing economic growth, a widening budget deficit and rising joblessness.

The rating was lowered to BBB from BBB+, while the outlook was raised to stable from negative, Fitch said in a statement from London yesterday. That followed downgrades by Standard & Poor’s and Moody’s Investors Service last year.

“Social and political tensions have increased as subdued growth, coupled with rising corruption and worsening government effectiveness, have constrained the government’s ability to improve living standards, reduce the 25.5 percent unemployment rate and redress historical inequalities as rapidly as the population demands,” Ed Parker, a managing director at Fitch, said in the statement.

The continent’s largest economy probably expanded at the slowest pace since a 2009 recession last year, limiting the government’s ability to meet budget-deficit targets and its room to stimulate growth and create jobs. The worst mining violence since the end of apartheid in 1994 shut platinum and gold mines last year, lowering South Africa’s growth rate by about 0.5 percentage point, according to the National Treasury.

“There has been a significant deterioration in South Africa’s credit worthiness,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in a phone interview yesterday. Fitch’s case “is much more substantive than speculative” about future events.

Slower Growth

The government is forecasting growth of 3 percent this year, compared with 2.5 percent in 2012. The budget gap is set to widen to 4.8 percent of gross domestic product in the 12 months through March from 4.5 percent a year earlier, Finance Minister Pravin Gordhan said in October.

S&P cut the nation’s assessment by one level to BBB on Oct. 12 and Moody’s lowered it on Sept. 27 by the same magnitude to Baa1. Both retained a negative outlook.

Slower economic growth is due in part to the recession in euro-area nations, crimping demand for manufactured exports, the Treasury said in an e-mailed statement after Fitch’s decision. The ruling African National Congress’ adoption of the 20-year National Development Plan at its conference last month will help ease poverty, create jobs and build infrastructure, it said.

The ANC re-elected Jacob Zuma as president, chose businessman Cyril Ramaphosa as his deputy and rejected calls to nationalize mining assets at the meeting.

Risk Premium

“The conference resolutions give certainty on economic policy, which the Fitch report does not seem to fully appreciate,” the Treasury said. The government’s budget shows an “unambiguous commitment to maintaining debt and expenditure growth within sustainable levels. These principles will continue to underpin South Africa’s fiscal stance.”

South Africa’s risk premium has dropped since the ANC conference, even as the Fitch downgrade loomed. The extra yield on the nation’s bonds due March 2021 over similar-maturity U.S. Treasuries narrowed 37 basis points since Dec. 15, a day before the ANC conference began, to 440 yesterday, the narrowest since December 2007, according to data compiled by Bloomberg.

Moody’s and S&P both cited the jobless rate as creating pressure on the government to boost social spending, limiting its ability to meet budget gap targets. Violent strikes at mines that began in August at Lonmin Plc.’s Marikana platinum shaft, which left more than 46 people dead, has also undermined the growth outlook.

‘Move Justified’

“We would agree with Fitch and see the move as justified,” Peter Attard Montalto, a London-based analyst at Nomura International Plc, said in an e-mailed note to clients. “Indeed, we worry that in our baseline many of the negative rating sensitivities that Fitch highlights come true –- in particular that there is a failure to generate faster employment growth, structural reforms remain slow and so there is little improvement in competitiveness.”

The rand extended its decline after the rating was cut, dropping as much as 1.1 percent to 8.6858 per dollar in Johannesburg yesterday. It was trading 0.4 percent weaker at 8.6849 against the dollar as of 7:28 a.m.

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