Overview
-- In our view, the strikes in South Africa's mining sector will likelyfeed into the political debate in the run-up to the 2014 elections, which mayincrease uncertainties related to the African National Congress' (ANC's)future policy framework.
-- We also expect South Africa's underlying social tensions to increasegovernment spending pressure and reduce its fiscal flexibility.
-- We now expect GDP growth to soften to not more than 2.5% in 2012, andthe current account deficit to increase to at least 5.1% of GDP.
-- We are therefore lowering the long-term foreign currency sovereigncredit rating on South Africa to 'BBB' from 'BBB+', and the long-term localcurrency 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 coulddeteriorate beyond our current expectations.
Rating ActionOn Oct. 12, 2012, Standard & Poor's Ratings Services lowered the long-termforeign 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'. Theoutlook remains negative.
The transfer & convertibility assessment is now 'A-'.RationaleIn our view, the strikes in South Africa's mining sector will likely feed intothe political debate in the run-up to the 2014 elections, which may increaseuncertainties related to the African National Congress' (ANC's) future policyframework. We also expect that South Africa's underlying social tensions willincrease spending pressures and reduce fiscal flexibility for the government.Due to production losses, we now expect GDP growth to soften to not more than2.5% in 2012 and the current account deficit to increase to at least 5.1% ofGDP. For 2013, we expect GDP growth of 3.0%.
After a wage increase of 12%-22% was agreed at the Marikana mine in September2012, strikes have beset the wider platinum and gold mining industry. Prior tothe wage increase, 34 workers had died at Marikana after clashes betweenpolice and several thousand protesters. Strikes have mostly been wildcat, andthe smaller and more radical Association of Mineworkers and Construction Union(AMCU) has questioned the legitimacy of the established National Union ofMineworkers (NUM).
We see an increased likelihood that the ANC will take on board more populistelements for its policy framework in the lead-up to the 2014 presidentialelections. In our view, it may try to counter the perceived loss in legitimacyof South Africa's political and social institutions, as well as ensure thecontinued support of the trade unions.
The ANC is currently ruling in a tri-partite coalition, including the Congressof South African Trade Unions (Cosatu), of which NUM is a member. The ANC willdesignate the presidential candidate for the 2014 elections, as well as setthe policy framework for the next tenure, at its National Conference inMangaung in December 2012. We believe that support for incumbent presidentJacob Zuma is still strong but may have weakened as result of perceptionssurrounding his leadership. Although we do not expect that the designation ofan alternative presidential candidate such as Mr. Kgalema Motlanthe--currentlyMr. Zuma's deputy--would lead to a substantial policy shift, it could increasepolicy uncertainties in the year ahead of the election.
We expect underlying social tensions may result in amplified spendingpressures and reduce fiscal flexibility for the government. While we thinkthat fiscal revenue for the financial year ending March 31, 2013, will not besubstantially affected by output losses in the mining industry--and that theOctober 2012 medium-term budget policy statement will not indicate majorfiscal slippage--we believe the commitment to fiscal consolidation could bechallenged in Mangaung. Consolidation could also be undermined by spendingpressures building in the year before the elections.
In addition to immediate output losses from the mining strikes, we considerthat the weaker business and investment climate may drag on South Africa'seconomic growth. We estimate that narrow net external debt will be equivalentto 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 lowerthe competitiveness of South Africa's labor-intensive mining industry.
Outlook
The negative outlook reflects our view that the medium-term political,economic, and fiscal ramifications of South Africa's social tensions coulddeteriorate beyond our current expectations. The difficulty of addressingeconomic and social imbalances could be exacerbated by increasing externalpressure in the context of sluggish global growth or investor risk aversion.
We could lower the ratings if South Africa's business and investment climateweakens more than we currently expect, for instance as a result of productioncost increases, and if this then leads to lower growth rates and increasedpressure on South Africa's balance of payments.
We could also lower the ratings if the diverging factions within the ANCimpede the formulation of a policy framework that is conducive to growth andjob creation, or if the ANC congress in December 2012 sets a policy frameworkthat we view as deviating from the path of fiscal consolidation. We could alsolower the local currency rating--potentially by more than one notch--if thegovernment's fiscal flexibility decreases, particularly if public sector wagesor debt service costs increase more than we currently expect.
We could affirm the ratings at the current levels and revise the outlook tostable if we were to see that the expected increase in public sector debt isoffset by an improvement in investment and economic growth prospects, and iffiscal consolidation continues.
Related Criteria And Research -- Sovereign Government Rating Methodology And Assumptions, June 30, 2011 -- Criteria For Determining Transfer And Convertibility Assessments, May18, 2009Ratings ListDowngraded; Ratings Affirmed To FromSouth Africa (Republic of)Sovereign Credit Rating Foreign Currency BBB/Negative/A-2 BBB+/Negative/A-2Downgraded To FromSouth Africa (Republic of)Sovereign Credit Rating Local Currency A-/Negative/A-2 A/Negative/A-1Transfer & Convertibility Assessment A- ASenior Unsecured Foreign Currency BBB BBB+Senior Unsecured Local Currency A- A
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(New York Ratings Team)
((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging:pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))