Johannesburg - Moody's warned on Thursday it may downgrade South Africa's A2 local currency rating, partly on worries about the economy, as manufacturing and mining data pushed the country further towards recession.
The ratings agency said the review reflected fiscal pressures, with the material risk of a prolonged recession, which it forecast for most of 2009, creating significant pressure on public finances.
"One possible outcome of the review could be an alignment of the foreign and domestic currency ratings at A3 by the end of the 3-month review period," Kristin Lindow, Senior Vice President and sovereign analyst, said in a statement.
But Moody's also affirmed the positive outlook on the government's Baa1 foreign currency rating and the A2/Baa1 foreign currency ceiling for debt and deposits.
The economy contracted by 1.8% in the fourth quarter of 2008, the first fall in a decade, weighed down by the biggest decline in manufacturing output in nearly 50 years.
A global downturn has hit manufacturers particularly hard, slashing exports, while consumers were already cutting back on spending due to higher interest rates, which rose by 500 basis points between June 2006 and June 2008.
Manufacturing data for January, released by Statistics South Africa, showed the sector was set even more strain in the first quarter of this year, reinforcing calls for aggressive interest rate cuts, soon.
Output fell 11.1%, the biggest decline since Stats SA started recording year-on-year data in 1999, mainly due to sharp declines for iron and steel production, and motor vehicles and parts. It contracted 1.2% compared with December.
"It's still a very weak figure and with the mining data that was released earlier today, it indicates that it doesn't bode well for the first quarter growth," Citadel economist Salomi Odendaal said.
Manufacturing is the second biggest sector in South Africa's economy, and vital for jobs.
Mining output data showed a similar trend.
Gold output fell by 8.75% in volume terms in January, while total mineral production dropped 11% compared with the same month in 2008.
Big rate cuts
South Africa is the world biggest producer of platinum, the demand for which has slid on plunging car sales, and remains a big producer of gold, although output is waned in recent years to its lowest level - in 2008 - since 1922.
Expected job losses in mining will heap pressure on the government to find ways new to boost employment, given high official unemployment, estimated at 21.9%.
Analysts said the data stressed the need for big rate cuts, and some renewed calls for a move before the scheduled April policy meeting.
"I think we are now seeing the full impact of the credit crisis on the South African economy and it is obviously a substantial impact, and all of this bodes well for further monetary easing," George Glynos, managing director of market analysts ETM, said.
The central bank has cut its repo rate by 150 basis points to 10.5% since December.
Moody's said a new administration after elections in April will come under pressure to spend more to help millions of jobless poor, straining public finances at a time when growth is slowing.
"There is clear evidence that the electorate is losing patience with the ongoing socio-economic problems such as poor educational attainment, high unemployment and crime," Lindow said.
"This may lead to higher government spending in the near to medium term although positive results cannot be guaranteed."
South Africa's Treasury shifted its budget into deficit for 2009/10 to help fund spending to boost the economy.
The government and its utilities plan infrastructure spending of R787bn over the next three years, but this may be under threat from tighter world credit markets.
Jacob Zuma, the ruling ANC leader and frontrunner for president after April, is seen closely aligned with the party's left wing allies - labour federation Cosatu and the small but influential communist party - unnerving some investors.
- Reuters