New York, United States — 15 October 2012 – Standard & Poor’s (S&P) “’ known to investors worldwide as a leader of financial market intelligence “’ has cut South Africa’s credit rating one notch to BBB with a negative outlook, saying mining strikes and social tensions could reduce fiscal flexibility and hurt growth in the continent’s biggest economy.
Reuters reports that the South African Treasury hit back, saying its spending plans were “realistic and achievable” and that there was no historical evidence from the 18 years since the end of apartheid to support S&P’s assertions.
“Our young democracy has seen several elections within the ruling party and government. None of these have impacted policy and budgeting in the manner that S&P suggests,” it said in a statement.
“Government will continue to invest in infrastructure with the view of enhancing the productive capacity of our economy and the competitiveness of our industries. This will be done in a manner consistent with fiscal sustainability.”
The rand, which fell to a 3-1/2 year low on Monday amid concerns about the impact to growth of mining and trucker strikes, shed nearly one percent against the dollar after the S&P cut.
It was trading at 8.75 at 1737 GMT, from 8.65 just before the announcement.
Bloomberg News reports that 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.
S&P’s downgrade from BBB-plus takes it one notch below both Moody’s Investors Service’s Baa1 rating with a negative outlook, as well as Fitch Ratings’ BBB-plus rating, also with a negative outlook.
“The negative outlook reflects our view that the medium-term political, economic and fiscal ramifications of South Africa’s social tensions could deteriorate beyond our current expectations,” S&P said.
“We expect underlying social tensions may result in amplified spending pressures and reduce fiscal flexibility for the government.” South African Finance minister Pravin Gordhan will present his interim budget to parliament on October 25.
In particular, S&P said mining strikes could influence political debate ahead of 2014 elections and “may increase uncertainties related to the African National Congress’ (ANC) future policy framework.” Before the 2014 election, the ruling ANC has to negotiate a potentially divisive internal leadership election in December
S&P added that it sees South African growth softening to around 2.5% in 2012, and the budget deficit increasing to at least 5.1% of output.
Large parts of the platinum and gold mining sectors have been brought to a standstill by wildcat strikes that started in early August and intensified after the police killing of 34 strikers at Lonmin’s Marikana platinum mine on August 16.
The bond market was closed when the S&P statement landed, but is likely to take a dive when it reopens today.
Source: Reuters and Bloomberg News. For more information, click here.