UPDATE 1-S.Africa's rand turns weaker after S&P downgrade

(Updates rand levels, adds bonds, background)

JOHANNESBURG, Oct 12 (Reuters) - South Africa's rand weakened on Friday after ratings agency S&P downgraded the country's local and foreign currency sovereign ratings, saying underlying social tensions would increase government spending pressure and reduce fiscal flexibility.

The rand fell to 8.77 to the dollar soon after the downgrade -- a loss of more than one percent on the day -- from 8.70 before the S&P release.

The currency closed at 8.66 in the New York market on Thursday.

Standard & Poor's cut South Africa's credit rating one notch to BBB with a negative outlook, saying mining strikes and social tension could reduce fiscal flexibility and hurt growth.

The move came three weeks after Moody's also cut South Africa's government bond rating by one notch to Baa1 from A3, citing worries about the country's institutions as well as future political stability and room for policy maneuvering.

The downgrades will add to the jitters of investors already worried over strikes which have hit the mining sector hardest with tens of thousands of workers downing tools since August, hitting output in the world's largest producer of platinum and one of the biggest of gold.

The rand plumbed a 3-1/2 year low of 8.995 on Monday as sentiment withered on the strikes, also weakening bonds and stocks. The currency remains vulnerable to negative sentiment over the job boycotts, analysts noted.

"While there seems to be some progress towards resolving some of the strikes, the protests have spread to other key sectors as well," said BNP Paribas.

"The tension is also likely to have a longer-lasting impact on the country's economic output, business confidence and investment."

The Johannesburg debt market closed way before the S&P release on Friday, sparing government bonds from a sell-off after the downgrade.

The yield on the three-year benchmark fell 5 basis points to 5.37 percent while the 14-year paper closed 8.5 basis points lower at 7.675 percent.

(Reporting by Stella Mapenzauswa; editing by Ron Askew)


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