Fitch Lowers South Africa Credit-Rating Outlook to Negative

South Africa’s credit-rating outlook was cut to negative from stable by Fitch Ratings because of a deterioration in the country’s growth prospects.

Fitch downgraded its gross domestic product growth forecasts to 1.7 percent in 2014 from a previous estimate of 2.8 percent, and 3 percent in 2015 from 3.5 percent, the company said today in an e-mailed statement. The rating was maintained at BBB, the second-lowest investment grade, it said.

“Increased strike activity, high wage demands and electricity constraints represent negative supply-side shocks,” Fitch said. “So far, the sharp depreciation of the rand over the past two years has not fed through to clear signs of improvement in competitiveness and growth.”

South Africa’s economy, the largest on the continent after Nigeria, is threatened with recession as a 20-week strike over pay shut the world’s biggest platinum mines. GDP contracted an annualized 0.6 percent in the three months through March, restricting the government’s ability to rein in the budget deficit as quickly as targeted.

The government is “alive to the growth challenges South Africa faces” and is therefore prioritizing the implementation of the National Development Plan, the National Treasury said in an e-mailed statement today. The NDP targets average annual growth of 5.4 percent.

Budget Deficit

Fitch said it expected “moderate slippage” in the budget deficit to 4.2 percent in 2014-15 and the government may miss it three-year target. The government has pledged to narrow the gap to 2.8 percent of GDP in three years’ time from 4 percent in the fiscal year that ended in March.

“Reducing the deficit to below 3 percent of GDP by 2016-17 will be challenging and dependent on a recovery in growth and adherence to tough expenditure ceilings,” it said.

The government remains committed to maintaining fiscal sustainability and keeping debt at manageable levels, the Treasury said.

“While short-term cyclical factors might cause marginal deviations from targets, we will not deviate from the long-term trajectory,” the Treasury said. “All necessary adjustments will be made to achieve the fiscal path.”

The ratings outlook has already been taken into account by the spread of credit default swaps, Carmen Nel, a fixed-income analyst at FirstRand Ltd.’s Rand Merchant Bank unit in Cape Town, said by phone today. The cost of insuring South Africa’s dollar debt against default rose for a third day on June 11, adding one basis point to 179.

Weaker Rand

“If they do follow through with a downgrade, then it should put upward pressure for the government as well as any entity related to the government,” she said. Eskom Holdings SOC Ltd. is the state-owned electricity utility while Transnet SOC Ltd. is the national ports and rail operator, companies that “would like to tap the offshore markets,” Nel said.

The rand weakened 0.7 percent to 10.7494 per dollar by 11:19 a.m. in Johannesburg, making it the second-worst performer among 16 major currencies tracked by Bloomberg. The yield on rand-denominated government bonds due December 2026 rose three basis points, or 0.03 percentage point, to 8.39 percent.

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.

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 or less.

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