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Cape Town - Ratings agency Standard & Poor's (S&P) on Friday downgraded South Africa's credit ratings, handing another blow to an economy struggling with labour, growth and electricity challenges.
S&P lowered South Africa’s long-term foreign currency credit rating to ‘BBB-‘ from ‘BBB’ and the long-term local currency rating to ‘BBB+’ from ‘A-‘. In addition, S&P has revised South Africa’s outlook to stable from negative.
"The downgrade reflects our expectation of lacklustre GDP growth in South Africa, against a backdrop of relatively high current account deficits, rising general government debt, and the potential volatility and cost of external financing," S&P's said in a statement.
The agency said a prolonged strike in the platinum sector, as well as weak domestic and external demand, led GDP to contract in the first quarter of 2014 and is likely to depress second-quarter GDP growth.
The strike has led to a 25% contraction in mining and quarrying output, and contributed to the overall economy contracting by 0.6% of GDP in the first quarter of 2014. It will likely lead either to another contraction or to only-feeble growth in the second quarter as well as disappointing growth for the full year.
"We now expect full-year GDP growth of 1.9% in 2014, rising to 2.9% in 2015 and 3.2% in 2016."
It also expects government debt to grow to 46% by 2017.
"General government debt, net of liquid assets, increased to 40% of GDP in 2013, from 23% in 2008, and we expect it to reach 46% by 2017."
On the economic outlook under the new administration, S&P said: "While we think that President Jacob Zuma's newly elected administration will continue the policies of his first administration, which controlled fiscal expenditure and fostered broadly stable prices, we do not believe it will manage to undertake major labour or other economic reforms that will significantly boost GDP growth.
"At the same time, we also do not believe the ANC-led government will entertain radical policies (such as the nationalisation of mines)."
S&P said it considered South Africa's contingent liabilities to be "limited" under its criteria. "Nevertheless, the government has R350bn (about 10% of GDP) available in potential guarantees for the state-owned utility Eskom."
Eskom currently uses about R120bn of these guarantees. Eskom's operating margins have been hurt by the lack of rate relief from the regulator as well as other factors and S&P believes Eskom's funding needs may require the government's guarantee envelope to increase by 2017.
S&P said its stable outlook reflects its view that current labour tensions will be resolved and that lacklustre economic performance will not affect South Africa's fiscal and external balance beyond its revised expectations.
"We could lower the ratings if South Africa's business and investment climate weakens further, for instance if labour disputes fester.
"We could also lower the ratings if external imbalances continue to increase, or funding for South Africa's current account or fiscal deficits becomes more difficult or costly.
"We could raise the ratings if an improvement in investment and economic growth prospects produces stronger government and external debt positions than we currently expect."
The S&P downgrade followed a review earlier on Friday by Fitch ratings agency.
Fitch revised the outlook on South Africa to negative from stable, and affirmed its long-term foreign and local currency issuer default ratings at 'BBB' and 'BBB+', respectively.
This was partly due to the impact of the crippling platinum sector wage strike. Fitch also voiced its concerns over poor prospects for economic growth and rising public debt.
- Fin24
S&P lowered South Africa’s long-term foreign currency credit rating to ‘BBB-‘ from ‘BBB’ and the long-term local currency rating to ‘BBB+’ from ‘A-‘. In addition, S&P has revised South Africa’s outlook to stable from negative.
"The downgrade reflects our expectation of lacklustre GDP growth in South Africa, against a backdrop of relatively high current account deficits, rising general government debt, and the potential volatility and cost of external financing," S&P's said in a statement.
The agency said a prolonged strike in the platinum sector, as well as weak domestic and external demand, led GDP to contract in the first quarter of 2014 and is likely to depress second-quarter GDP growth.
The strike has led to a 25% contraction in mining and quarrying output, and contributed to the overall economy contracting by 0.6% of GDP in the first quarter of 2014. It will likely lead either to another contraction or to only-feeble growth in the second quarter as well as disappointing growth for the full year.
"We now expect full-year GDP growth of 1.9% in 2014, rising to 2.9% in 2015 and 3.2% in 2016."
It also expects government debt to grow to 46% by 2017.
"General government debt, net of liquid assets, increased to 40% of GDP in 2013, from 23% in 2008, and we expect it to reach 46% by 2017."
On the economic outlook under the new administration, S&P said: "While we think that President Jacob Zuma's newly elected administration will continue the policies of his first administration, which controlled fiscal expenditure and fostered broadly stable prices, we do not believe it will manage to undertake major labour or other economic reforms that will significantly boost GDP growth.
"At the same time, we also do not believe the ANC-led government will entertain radical policies (such as the nationalisation of mines)."
S&P said it considered South Africa's contingent liabilities to be "limited" under its criteria. "Nevertheless, the government has R350bn (about 10% of GDP) available in potential guarantees for the state-owned utility Eskom."
Eskom currently uses about R120bn of these guarantees. Eskom's operating margins have been hurt by the lack of rate relief from the regulator as well as other factors and S&P believes Eskom's funding needs may require the government's guarantee envelope to increase by 2017.
S&P said its stable outlook reflects its view that current labour tensions will be resolved and that lacklustre economic performance will not affect South Africa's fiscal and external balance beyond its revised expectations.
"We could lower the ratings if South Africa's business and investment climate weakens further, for instance if labour disputes fester.
"We could also lower the ratings if external imbalances continue to increase, or funding for South Africa's current account or fiscal deficits becomes more difficult or costly.
"We could raise the ratings if an improvement in investment and economic growth prospects produces stronger government and external debt positions than we currently expect."
The S&P downgrade followed a review earlier on Friday by Fitch ratings agency.
Fitch revised the outlook on South Africa to negative from stable, and affirmed its long-term foreign and local currency issuer default ratings at 'BBB' and 'BBB+', respectively.
This was partly due to the impact of the crippling platinum sector wage strike. Fitch also voiced its concerns over poor prospects for economic growth and rising public debt.
- Fin24
