Cape Town - International rating agency Standard & Poor’s on Friday lowered 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'.
S&P 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 ratings agency said its downgrade follows ongoing labour unrest in South Africa.
"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," it said in a statement.
Due to production losses, S&P now expected 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%."
S&P said the Lonmin's wage settlement at the Marikana mine in September had set a precedent for other mine workers striking for wage increases.
"After a wage increase of 12% to 22% was agreed at the Marikana mine in September 2012, strikes have beset the wider platinum and gold mining industry."
Before the wage deal, 34 workers were killed in clashes with police and several thousand protesters, taking the death toll at Marikana to almost 50.
"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," S&P said.
S&P said it expected underlying social tensions may result in amplified spending pressures and reduce fiscal flexibility for the government.
"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."
S&P also warned that it could lower the ratings if South Africa’s business and investment climate weakens more than it currently expected, 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."
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