South Africa’s Credit Rating Cut Amid Mining Strikes

(Alex Canan)
South Africa’s credit rating was cut by Moody’s Investors Service because of the government’s inability to deal with economic and political challenges amid the worst mining violence since the end of apartheid.
The rating was lowered by one level to Baa1, with the outlook remaining negative, Moody’s said in an e-mailed statement today. That puts South Africa in line with Mexico, Russia and Thailand. Moody’s rates South African debt at the third-lowest investment-grade level, the same as Fitch Ratings and Standard & Poor’s.
“The revision reflects Moody’s view of the South African authorities’ reduced capacity to handle the current political and economic situation and to implement effective strategies that could place the economy on a path to faster and more inclusive growth,” the ratings company said in a statement.
The downgrade comes after six weeks of labor unrest that’s left at least 46 people dead and shut mines owned by Lonmin Plc (LMI), Anglo American Platinum Ltd. (AMS) and AngloGold Ashanti Ltd. Growth in Africa’s biggest economy is also under pressure as a debt crisis in Europe cuts export demand from a region that buys about a third of South Africa’s manufactured goods.

Investor Concerns

Recent events have heightened investors’ concerns of “socio-economic challenges, in particular the high unemployment rate,” Kristin Lindow, Moody’s sovereign analyst, said in a phone interview from New York. “The government has a moderate level of institutional capacity to deal with the pressures.”
She declined to say why the downgrade was made before the Oct. 24 medium-term budget or comment on the nature of its discussions with the government.
The rand erased today’s gains, dropping as much as 0.6 percent against the dollar to 8.2849 after Moody’s statement. The currency was trading at 8.2197 as of 7:25 p.m. in Johannesburg.
“President Jacob Zuma needs to take charge of the country’s economic direction,” Thabi Leoka, head of economic research at Standard Bank Group Ltd., Africa’s biggest lender, said in a phone interview from Johannesburg. “There hasn’t been much in terms of leadership, especially in terms of economic development.”

Slower Growth

Finance Minister Pravin Gordhan is set to lower his growth forecasts next month. In February, he predicted the economy will expand 2.7 percent, the slowest pace since a 2009 recession. The government estimates it needs annual expansion of 7 percent in order to meet a goal of reducing the jobless rate to 14 percent by 2020. The unemployment rate of 24.9 percent is the highest of more than 60 nations tracked by Bloomberg
Moody’s lowered its forecast for this year’s economic growth to 2.5 percent from 2.9 percent and cut the projection for 2013 to 3.3 percent from 4 percent, Lindow said.
The government’s lack of fiscal room to respond to slower economic growth and social pressures is another reason for the downgrade, Moody’s said. Gordhan had pledged in his February budget to narrow the deficit to 3 percent of gross domestic product in the year through March 2015 from an estimated 4.6 percent this year.

Radical Shift

South Africa is addressing all of the reasons given by Moody’s for the downgrade in various government programs, the National Treasury said in an e-mailed statement. The government is “committed” to raising the economy’s growth potential and competitiveness through infrastructure spending, reducing the deficit and investing in education, it said.
Plans by the ruling African National Congress for a “radical shift” in policy to address joblessness and poverty may mean an increase in state intervention in the economy, undermining the growth outlook, Lindow said.
“To the extent that will deter foreign inflows, it could impact on the growth potential,” she said.
Zuma said at the ANC’s policy conference in June the party is pushing for “more radical policies and decisive action to achieve the change we envisage.” He didn’t specify the measures that will be taken.