(Updates with analyst comment in ninth paragraph.)
Jan. 13 (Bloomberg) -- South Africa’s credit-rating outlook was cut to negative by Fitch Ratings as stagnating growth curbs job creation and curbs the government’s ability to manage its deficit. The rand erased gains made so far this year.
Fitch, which lowered the outlook from stable, affirmed the BBB+ foreign-currency credit rating for Africa’s biggest economy, it said in an e-mailed statement today. The assessment is the third-lowest investment grade on its rating scale.
The rand dropped the most in more than a month against the dollar after the statement was released, losing as much as 2.2 percent to 8.2254 and erasing its advance this year. Rand- denominated debt due in 2015 fell for the first time in four days, raising the yield nine basis points, or 0.09 percentage point, to 6.83 percent.
“Not least of the problems that require urgent attention is the economy’s inability to create sufficient jobs for its labor force,” Purvi Harlalka, a London-based credit analyst, wrote in the note. “Failure to accelerate growth and make it more labor-intensive on a sustained basis will gradually weaken South Africa’s credit fundamentals and have negative implications for the rating.”
South Africa’s unemployment rate surged to 25 percent in the third quarter, the highest of the 61 nations tracked by Bloomberg, as the economy expanded near the slowest pace in about two years. Gross domestic product needs to expand 7 percent annually through 2020 to cut the rate to 14 percent, the government has said.
National Treasury Concern
“Of concern to us is that this revision comes barely a year after Fitch Ratings revised South Africa’s outlook from negative to stable,” the National Treasury said in a statement posted on its website. “The Fitch statement, however, confirms that South Africa’s key rating drivers remain strong while the rating remains underpinned by the strength of our institutions relative to our peers.”
The South African Reserve Bank won’t comment on the matter, spokesman Hlengani Mathebula said when contacted on his mobile phone.
The budget deficit will widen to 5.5 percent in the year through March, from a revised 4.6 percent in the previous 12- month period, the National Treasury said on Oct. 25. Finance Minister Pravin Gordhan cut the government’s forecast for growth to 3.4 percent for this year, from a previous estimate of 4.1 percent, on Oct. 25.
The likelihood of an actual downgrade “at this point is minimal,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in a telephone interview.
“We all know that South Africa is spending that much more on the social side and is forecasting a budget deficit, but that’s just the Treasury being realistic,” Khan said. “Fiscal consolidation is still the long-term aim.”
Moody’s Investors Service reduced the outlook on South Africa’s A3 rating to negative from stable on Nov. 9, citing “heightened political risk.” Standard & Poor’s has a stable outlook on its BBB+ rating for South Africa.
While the ruling African National Congress is unlikely to expropriate assets, the debate sparked by the party’s youth wing has “upset” investor confidence, Fitch said. Steps to nationalize mining assets would have “immediate and negative consequences for the rating.”
ANC Youth League President Julius Malema has called for mines to be nationalized in South Africa, the world’s largest producer of platinum and chrome. He is appealing a five-year suspension from the party after he was found guilty of undermining the organization.
“Political noise has increased in recent months and is set to continue this year,” Fitch said in the statement. “However, Fitch sees the threat of nationalization -- a key focus of debate -- as being remote.”
--Editors: Ana Monteiro, Karl Maier
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