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January 10, 2013 7:37 pm
Fitch, the rating agency, has downgraded South Africa’s sovereign credit rating, citing a deterioration of the country’s economic prospects, which it said had affected public finances and exacerbated social and political tensions.
The decision by Fitch to downgrade the long-term foreign currency rating to BBB from BBB+ follows similar moves by Moody’s and Standard & Poor’s late last year as Africa’s largest economy battled against a wave of violent wildcat strikes in its crucial mining sector.
“Social and political tensions have increased as subdued growth, coupled with rising corruption and worsening government effectiveness, has constrained the government’s ability to improve living standards, reduce the 25.5 per cent unemployment rate and redress historical inequalities as rapidly as the population demands,” Fitch said.
“Protests over poor service delivery increased to record levels in 2012 and the economy has been beset by violent strikes that have affected growth and the current account.”
The mining strikes, which primarily hit the gold and platinum sectors and drew in more than 100,000 workers at their peak, were resolved around October and November. But more than 50 people were killed in strike-related violence, while strikes and stoppages last year cost the industry more than R10bn in lost production.
The industrial strife also graphically highlighted mounting frustrations among many South Africans about the high levels of unemployment and poverty in one of the world’s most unequal societies more than 18 years after the end of apartheid.
This week, some 1,500 farm workers in the wine-producing Western Cape province went on strike demanding that their minimum wage is raised from R69 ($8) a day to R150. That unrest has also been marred by violence, but has yet to have a significant impact on wine producers, which are due to begin their harvest this month.
While sub-Saharan Africa has enjoyed average gross domestic product growth of about 5.5 per cent in 2012, South Africa’s economy was forecast to expand by about 2.5 per cent last year.
That is partly because as the continent’s most developed economy, South Africa is among the most heavily exposed emerging markets to the eurozone crisis, with about a third of its manufactured exports shipped to Europe. But businessmen also complain about policy uncertainty, infrastructure bottlenecks and rising costs, mainly driven by electricity price increases and repeated above-inflation salary increases.
“A trend decline in competitiveness, reflecting wage settlements above productivity and infrastructure constraints, contributed to a widening in the current account deficit to 6.5 per cent of GDP in 2012 (Fitch estimate) from 3.4 per cent of GDP in 2011,” Fitch said. “The country’s net external debt position has also been trending up since 2006.”
However, the rating agency, which has the country on a stable outlook, added that South Africa’s investment grade rating was underpinned by a “generally sound banking system” and a “deep local bond market”. It also said South Africa outscores the BBB range median on all six of the World Bank’s governance indicators.
South Africa’s Treasury responded to the latest downgrade by saying some of the drivers have their roots in the euro crisis.
“The South African government is consistently making efforts to address the concerns identified in Fitch’s rating review which is aimed at mitigating growth and socioeconomic concerns,” the Treasury said. “Government is aware of the challenges of poverty and unemployment the country is facing.”
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