South Africa’s Credit Rating Cut to One Level Above Junk by S&PRene Vollgraaff
South Africa’s credit rating was cut to one level above junk by Standard & Poor’s as the longest mining strike in the nation’s history threatens to drag the economy into recession, curbing government revenue.
The foreign-currency rating was lowered to BBB- from BBB and the local-currency rating was reduced to BBB+ from A-, S&P said in a statement yesterday. The outlook on the ratings were raised to stable from negative. Fitch Ratings also lowered the outlook on its BBB grading to negative from stable.
South Africa’s economy, the second-largest on the continent after Nigeria, contracted in the first quarter for the first time since 2009 as a 20-week strike over pay shut the world’s biggest platinum mines. Weaker growth may restrict the government’s ability to rein in the budget deficit as quickly as targeted.
“The fiscal stance over the next few years may become exposed to lower-than-expected economic growth, pressures from a new round of public-sector wage negotiations, and increased public spending needs,” S&P said.
The rand pared losses after the statement and traded 0.2 percent lower against the dollar at 10.6964 as of 6:30 p.m. in Johannesburg yesterday. The yield on rand-denominated government bonds due December 2026 rose three basis points, or 0.03 percentage point, to 8.4 percent.
“Market reaction is blunted by the fact that a risk of a downgrade had largely been priced in,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in an e-mailed note to clients. “Some had even spoken of the likelihood of a two-notch downgrade from S&P. From this perspective, the assigning of a ‘stable’ outlook to South Africa’s rating by S&P is positive news, relatively speaking.”
The government has pledged to narrow the budget deficit to 2.8 percent of GDP in three years’ time from 4 percent in the fiscal year that ended in March. The National Treasury said in an e-mailed statement yesterday its ability and commitment to service its debt hasn’t changed.
“Unforeseeable cyclical factors such as the prolonged strike in parts of the platinum sector might sometimes cause marginal short-term deviations from the forecasted path,” the Treasury said. “However, government will not deviate materially from the long-term fiscal consolidation path.”
The World Bank this week cut its 2014 growth forecast for South Africa to 2 percent from 2.7 percent, while the International Monetary Fund said it may reduce its estimate to about 2 percent of less.
S&P lowered its growth forecast for this year to 1.9 percent. While President Jacob Zuma’s administration will probably continue its policies from its first term, “we do not believe it will manage to undertake major labor or other economic reforms that will significantly boost GDP growth,” S&P said.
Newly elected Deputy President Cyril Ramaphosa will oversee the implementation of the National Development Plan, which targets annual average growth of 5.4 percent, the Treasury said. Reforms to help unlock South Africa’s growth potential will be “implemented with higher vigor and determination,” it said.
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 more than 300 upgrades, downgrades and outlook changes since 1974 and through December 2012.