Overview
— 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 South Africa’s underlying social tensions to increase
government spending pressure and reduce its fiscal flexibility.
— We now expect 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.
— We are therefore lowering 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’.
— The negative outlook reflects our view that the medium-term political,
economic, and fiscal ramifications of South Africa’s social tensions could
deteriorate beyond our current expectations.
Rating Action
On Oct. 12, 2012, Standard Poor’s Ratings Services lowered the long-term
foreign currency sovereign credit rating on the Republic of South Africa
(South Africa) to ‘BBB’ from ‘BBB+’ and the long-term local currency rating to
‘A-‘ from ‘A’. We 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 transfer convertibility assessment is now ‘A-‘.
Rationale
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.
Due to production losses, we now expect 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%.
After a wage increase of 12%-22% was agreed at the Marikana mine in September
2012, strikes have beset the wider platinum and gold mining industry. Prior to
the wage increase, 34 workers had died at Marikana after clashes between
police and several thousand protesters. 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.
The ANC is currently ruling in a tri-partite coalition, including the Congress
of South African Trade Unions (Cosatu), of which NUM is a member. The ANC will
designate the presidential candidate for the 2014 elections, as well as set
the policy framework for the next tenure, at its National Conference in
Mangaung in December 2012. We believe that support for incumbent president
Jacob Zuma is still strong but may have weakened as result of perceptions
surrounding his leadership. Although we do not expect that the designation of
an alternative presidential candidate such as Mr. Kgalema Motlanthe–currently
Mr. Zuma’s deputy–would lead to a substantial policy shift, it could increase
policy uncertainties in the year ahead of the election.
We expect underlying social tensions may result in amplified spending
pressures and reduce fiscal flexibility for the government. While we think
that fiscal revenue for the financial year ending March 31, 2013, will not be
substantially affected by output losses in the mining industry–and that the
October 2012 medium-term budget policy statement will not indicate major
fiscal slippage–we believe the commitment to fiscal consolidation could be
challenged in Mangaung. Consolidation could also be undermined by spending
pressures building in the year before the elections.
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. We estimate that narrow net external debt will be equivalent
to a still-low 20% of current account receipts at year-end 2012. In our view,
labor relations could become more tense and higher wage settlements may lower
the competitiveness of South Africa’s labor-intensive mining industry.
Outlook
The negative outlook reflects our view that the medium-term political,
economic, and fiscal ramifications of South Africa’s social tensions could
deteriorate beyond our current expectations. The difficulty of addressing
economic and social imbalances could be exacerbated by increasing external
pressure in the context of sluggish global growth or investor risk aversion.
We could lower the ratings if South Africa’s business and investment climate
weakens more than we currently expect, 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. We could also
lower the local currency rating–potentially by more than one notch–if the
government’s fiscal flexibility decreases, particularly if public sector wages
or debt service costs increase more than we currently expect.
We could affirm the ratings at the current levels and revise the outlook to
stable if we were to see that the expected increase in public sector debt is
offset by an improvement in investment and economic growth prospects, and if
fiscal consolidation continues.
Related Criteria And Research
— Sovereign Government Rating Methodology And Assumptions, June 30, 2011
— Criteria For Determining Transfer And Convertibility Assessments, May
18, 2009
Ratings List
Downgraded; Ratings Affirmed
To From
South Africa (Republic of)
Sovereign Credit Rating
Foreign Currency BBB/Negative/A-2 BBB+/Negative/A-2
Downgraded
To From
South Africa (Republic of)
Sovereign Credit Rating
Local Currency A-/Negative/A-2 A/Negative/A-1
Transfer Convertibility Assessment A- A
Senior Unsecured Foreign Currency BBB BBB+
Senior Unsecured Local Currency A- A
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard Poor’s public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column.
