TEXT-S&P cuts South Africa's foreign currency rating to 'BBB'
-- In our view, the strikes in South Africa's mining sector will likely feed into the political debate in the run-up to the 2014 elections, which may increase uncertainties related to the African National Congress' (ANC's) future policy framework.
-- We also expect South Africa's underlying social tensions to increase government spending pressure and reduce its fiscal flexibility.
-- We now expect GDP growth to soften to not more than 2.5% in 2012, and the current account deficit to increase to at least 5.1% of GDP.
-- We are therefore lowering the long-term foreign currency sovereign credit rating on South Africa to 'BBB' from 'BBB+', and the long-term local currency rating to 'A-' from 'A'.
-- 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.
Rating Action On Oct. 12, 2012, Standard & Poor's Ratings Services lowered the long-term foreign currency sovereign credit rating on the Republic of South Africa (South Africa) to 'BBB' from 'BBB+' and the long-term local currency rating to 'A-' from 'A'. We also lowered the short-term local currency rating to 'A-2' from 'A-1' and affirmed the short-term foreign currency rating at 'A-2'. The outlook remains negative.
The transfer & convertibility assessment is now 'A-'. Rationale In our view, the strikes in South Africa's mining sector will likely feed into the political debate in the run-up to the 2014 elections, which may increase uncertainties related to the African National Congress' (ANC's) future policy framework. We also expect that South Africa's underlying social tensions will increase spending pressures and reduce fiscal flexibility for the government. Due to production losses, we now expect GDP growth to soften to not more than 2.5% in 2012 and the current account deficit to increase to at least 5.1% of GDP. For 2013, we expect GDP growth of 3.0%.
After a wage increase of 12%-22% was agreed at the Marikana mine in September 2012, strikes have beset the wider platinum and gold mining industry. Prior to the wage increase, 34 workers had died at Marikana after clashes between police and several thousand protesters. Strikes have mostly been wildcat, and the smaller and more radical Association of Mineworkers and Construction Union (AMCU) has questioned the legitimacy of the established National Union of Mineworkers (NUM).
We see an increased likelihood that the ANC will take on board more populist elements for its policy framework in the lead-up to the 2014 presidential elections. In our view, it may try to counter the perceived loss in legitimacy of South Africa's political and social institutions, as well as ensure the continued support of the trade unions.
The ANC is currently ruling in a tri-partite coalition, including the Congress of South African Trade Unions (Cosatu), of which NUM is a member. The ANC will designate the presidential candidate for the 2014 elections, as well as set the policy framework for the next tenure, at its National Conference in Mangaung in December 2012. We believe that support for incumbent president Jacob Zuma is still strong but may have weakened as result of perceptions surrounding his leadership. Although we do not expect that the designation of an alternative presidential candidate such as Mr. Kgalema Motlanthe--currently Mr. Zuma's deputy--would lead to a substantial policy shift, it could increase policy uncertainties in the year ahead of the election.
We expect underlying social tensions may result in amplified spending pressures and reduce fiscal flexibility for the government. While we think that fiscal revenue for the financial year ending March 31, 2013, will not be substantially affected by output losses in the mining industry--and that the October 2012 medium-term budget policy statement will not indicate major fiscal slippage--we believe the commitment to fiscal consolidation could be challenged in Mangaung. Consolidation could also be undermined by spending pressures building in the year before the elections.
In addition to immediate output losses from the mining strikes, we consider that the weaker business and investment climate may drag on South Africa's economic growth. We estimate that narrow net external debt will be equivalent to a still-low 20% of current account receipts at year-end 2012. In our view, labor relations could become more tense and higher wage settlements may lower the competitiveness of South Africa's labor-intensive mining industry.
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. The difficulty of addressing economic and social imbalances could be exacerbated by increasing external pressure in the context of sluggish global growth or investor risk aversion.
We could lower the ratings if South Africa's business and investment climate weakens more than we currently expect, for instance as a result of production cost increases, and if this then leads to lower growth rates and increased pressure on South Africa's balance of payments.
We could also lower the ratings if the diverging factions within the ANC impede the formulation of a policy framework that is conducive to growth and job creation, or if the ANC congress in December 2012 sets a policy framework that we view as deviating from the path of fiscal consolidation. We could also lower the local currency rating--potentially by more than one notch--if the government's fiscal flexibility decreases, particularly if public sector wages or debt service costs increase more than we currently expect.
We could affirm the ratings at the current levels and revise the outlook to stable if we were to see that the expected increase in public sector debt is offset by an improvement in investment and economic growth prospects, and if fiscal consolidation continues.
Related Criteria And Research -- Sovereign Government Rating Methodology And Assumptions, June 30, 2011 -- Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009 Ratings List Downgraded; Ratings Affirmed To From South Africa (Republic of) Sovereign Credit Rating Foreign Currency BBB/Negative/A-2 BBB+/Negative/A-2 Downgraded To From South Africa (Republic of) Sovereign Credit Rating Local Currency A-/Negative/A-2 A/Negative/A-1 Transfer & Convertibility Assessment A- A Senior Unsecured Foreign Currency BBB BBB+ Senior Unsecured Local Currency A- A
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(New York Ratings Team)