Fitch cuts South Africa rating to BBB on worsened growth outlook after strikes.

By bne IntelliNews January 14, 2013
Fitch Ratings has cut South Africa's credit rating to the second-lowest investment grade citing worsened economic growth prospects, exacerbating social and political tensions, weakened public finances and a trend for decline in competitiveness. The global rating agency downgraded South Africas long-term foreign currency Issuer Default Rating (IDR) to BBB from BBB+ and its long-term local currency IDR to BBB+ from A and assigned the ratings a stable outlook. The agency also downgraded the short-term IDR to F3 from F2 and the country ceiling to A- from A. South Africas GDP growth averaged 2.2% in the five years to 2012, compared with 4.7% for emerging markets as a whole, according to Fitch, which said that the weak growth came as s a result from structural rigidities, declining competitiveness, policy uncertainty and labour unrest. Fitch estimates South Africa's medium-term growth potential at 3.5%, assuming some pick up in global growth. The agency estimates that to countrys government debt would have risen to 41% of GDP at end-2012 from 27% at end-2008, and will grow further this year, as the government had announced slippage in its budget deficit consolidation plans out to 2014/15. The trend for decline in competitiveness reflects wage settlements above productivity and infrastructure constraints, which contributed to a widening in the current account deficit to 6.5% of GDP in 2012, as estimated by Fitch, from 3.4% of GDP in 2011. The agency noted that social and political tensions have increased as subdued growth, coupled with rising corruption and worsening government effectiveness, have constrained the government's ability to improve living standards, reduce the 25.5% unemployment rate and redress historical inequalities as rapidly as the population demands. Last year, South Africa was hit by the worst labour unrest since the end of the apartheid in 1994, as the countrys key gold and platinum mining industries were paralysed for several months by violent strikes, which dented economic growth and affected negatively the current account. On the positive side, Fitch noted that South Africa's investment grade rating is underpinned by a generally sound banking system, a deep local bond market that allows the sovereign to borrow in its own currency (91% of the total) at long maturities and a floating exchange rate and inflation-targeting regime that is an effective shock absorber. Fitch is the last of the three major credit rating agencies to cut the ratings on South Africa after the wave of violent strikes hit its economy. In October, Standard & Poor's lowered South Africas long-term foreign currency sovereign credit rating to BBB from BBB+, saying mining strikes and social tensions would hurt economic growth and weaken fiscal flexibility. At the end of September, Moody's downgraded South Africa's government bond rating to Baa1 from A3, citing concerns about the government's institutional strength and the countrys investment climate and political stability.

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