Labour unrest in the mining sector has hit where it hurts. So what does South Africa's first credit downgrade in nearly two decades mean?
South Africa;s credit rating is likely to be constrained at current levels for the foreseeable future, due to high levels of poverty and unemployment, Moody's Investors Service said.
Wide income disparities, poor education standards and high crime levels are also limiting the rating within the Baa range, the New York-based company said in an emailed report on Tuesday.
Moody's lowered the rating in September 2012 to Baa1, the third-lowest investment-grade level, with a negative outlook, as economic growth slowed and the government’s budget deficit widened. Standard & Poor’s and Fitch Ratings have a BBB assessment on the nation's debt, one level below Moody’s.
South Africa's credit strengths included "manageable albeit rising public debt," complementary monetary, fiscal and exchange rate policies and a strong natural resource base, Moody's said. Poor labour productivity, a weak national savings rate and substantial infrastructure constraints are credit challenges, the ratings company said.
While higher savings and investment rates may help boost the ratings, a downgrade could occur "should the government’s direct debt rise much above 45% of gross domestic product", Moody’s said.
The unemployment rate was 24.7% in the third quarter, while the government is projecting gross debt will climb to 47.7% in the year through March 2017.
Interest rates
Moody's said the central bank is unlikely to raise interest rates until late 2014 and it doesn't expect the government to post budget surpluses until the fiscal year through March 2016 at the earliest. The Reserve Bank has kept its key rate unchanged at 5% since July 2012.
The rand extended its gain after Moody's statement, rising 1% to 10.6505 against the dollar as of 5:02 p,m. The government bond due in December 2026 was unchanged at 8.28%.
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. – Bloomberg