Tuesday, 9 April 2013

Standard and Poor’s (S & P) cut South Africa’s sovereign rating to BBB

S&PVENTURES AFRICA – Standard and Poor’s (S & P) cut South Africa’s sovereign rating to BBB with a negative outlook on Friday, causing the rand to fall by 1.2 per cent in Johannesburg by Friday’s close of play.

South Africa’s rating was dropped only one level from BBB+ to BBB, with the rating agency citing unrest caused by recent mining strikes as likely to give rise to increased government spending.

In its report explaining the drop in rating, S & P said: “We also expect that South Africa’s underlying social tensions will increase spending pressures and reduce fiscal flexibility for the government”.

As Africa’s largest economy struggles to regain control over its work force, which has experienced strikes across multiple sectors since labour unrest sparked with the violent protests at platinum producer Lonmin’s mines at Marikana in August, the economic outlook for the country has begun a deterioration which is predicted to continue as investors flee the country due to the widely perceived economic instability.

Last week, Reserve Bank governor Gill Marcus spoke up at a lecture to economics students at Rhodes University, telling them: “The outlook at the moment is deteriorating rapidly”, due to a loss of investor confidence. She added that as labour costs for employers are pushed up by the striking work force: “One of the inevitable consequences that is likely to come out of it is loss of jobs”. She concluded that: “We have been seen as a destination of choice…This has all changed over the last few weeks.”

The country’s Central Bank recently cut its growth forecast for the country to 2.6 per cent, with the government expected to follow the move next week as Finance Minister Pravin Gordhan is set to present the mid-term budget to Parliament.

The classification change comes only two weeks after Moody’s Investor Service also reclassified the country’s rating, dropping South Africa to Baa1 from A3, citing the government’s “reduced capacity to handle the current political and economic situation”.

The Rand reacted immediately to the rating downgrade, experiencing a 1.2 per cent drop on Friday; trading at 8.7621 rand ($ 1.0020) to the dollar by close of play on the Johannesburg Stock Exchange.
The currency saw a further drop at opening today, trading at 8.7586 rand ($ 1.0016) per dollar – a 0.4 percent decline.

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