Ratings outlook revised to negative due to strikes, electricity constraints

2014-06-13 08:42

South Africa’s credit rating outlook was revised to negative from stable by Fitch Ratings because of a deterioration in the country’s growth prospects.

Fitch downgraded its gross domestic product growth forecasts to 1.7% in 2014 from a previous estimate of 2.8%, and 3% in 2015 from 3.5%, the company said today in an emailed statement. The rating was maintained at BBB, it said.

“Increased strike activity, high wage demands and electricity constraints represent negative supply side shocks,” Fitch said. “So far, the sharp depreciation of the rand over the past two years has not fed through to clear signs of improvement in competitiveness and growth.”

South Africa’s economy, the second-largest on the continent after Nigeria, is threatened with recession as a 20-week strike over pay shut the world’s biggest platinum mines. GDP contracted an annualised 0.6% in the three months through March, restricting the government’s ability to rein in the budget deficit as quickly as targeted.

The government has pledged to narrow the budget gap to 2.8% of GDP in three years’ time from 4% in the fiscal year that ended in March. Fitch said it expected “moderate slippage” in the deficit to 4.2% in 2014-15 and the government may miss its three-year target.

“Reducing the deficit to below 3% of GDP by 2016-17 will be challenging and dependent on a recovery in growth and adherence to tough expenditure ceilings,” it said.

Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on more than 300 upgrades, downgrades and outlook changes since 1974 and through December 2012.

The World Bank this week cut its 2014 growth forecast for South Africa to 2% from 2.7%, while the International Monetary Fund said it may reduce its estimate to about 2% or less.

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