South Africa's credit rating is downgraded by Standard and Poor's

Out-Law News | 09 Jul 2014 | 12:18 pm | 2 min. read

Standard and Poor's (S&P), the credit rating agency, has downgraded South Africa's credit rating for the second time in less than two years , according to the Financial Times.

The S&P website stated that it has lowered the long-term foreign currency sovereign credit rating on South Africa to "BBB-" from "BBB". The agency has also lowered the country's long-term local currency rating to "BBB+" from "A-".

In addition S&P has lowered the short-term foreign currency rating to "A-3" from "A-2" and affirmed the short-term local currency rating at "A-2".

"The outlook is stable," the rating agency said of South Africa, which is regarded as Africa's most developed economy.

S&P attributed the downgrade in part to a five-month wage strike in South Africa's platinum mining sector. Around 70,000 workers downed tools in January in a strike which the Financial Times said has cost more than $2 billion in lost revenue. Last week Anglo American Platinum, Impala and Lonmin said they had reached an agreement in “principle” with union leaders to bring an end to the strike said the newspaper. 

A contraction in gross domestic product (GDP) and relatively high current account deficits were also responsible for the downgrading, S&P said.

S&P's rating overview on its website said: "A prolonged strike in the platinum mining sector, as well as weak domestic and external demand, has led to a contraction in GDP in the first quarter of 2014 and is likely to depress second-quarter and full-year GDP growth rates and reduce South Africa's fiscal flexibility."

"In addition, current account deficits are relatively high, and their financing relies on potentially volatile capital flows," said the S&P overview. "We are therefore lowering the long-term foreign currency rating on South Africa to 'BBB-' from 'BBB' and the long-term local currency rating to 'BBB+' from 'A-'."

"The stable outlook reflects our view that current labour tensions will be resolved and that lacklustre economic performance will not affect South Africa's fiscal and external balance beyond our revised expectations," the report said.

Further explaining its rationale for the rating, S&P said: "A prolonged strike in the platinum sector, as well as weak domestic and external demand, led GDP to contract in the first quarter of 2014 and is likely to depress second-quarter GDP growth. The strike has led to a 25% contraction in mining and quarrying output, and contributed to the overall economy contracting by 0.6% of GDP in the first quarter of 2014. It will likely lead either to another contraction or to only-feeble growth in the second quarter as well as disappointing growth for the full year."

"While South Africa's fiscal outturn has held up so far, 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. "Although we expect the treasury to abide by its expenditure ceiling, slowing growth may reduce revenues and possibly place overall fiscal targets beyond reach."

S&P said that general government debt, net of liquid assets, increased to 40% of GDP in 2013, from 23% in 2008. The agency expects it to reach 46% by 2017, it said.

S&P said that the "ratings are also constrained by sizable current account deficits".

According to the Financial Times, the rating agency Fitch Ratings recently revised its outlook for South Africa from stable to negative, while maintaining its BBB rating.

South Africa's finance ministry responded to the downgrade by saying the government “will not deviate materially from the long-term fiscal consolidation path," said the newspaper.