In case the mining strikes weren’t bad enough, Moody’s Investors Service lowered South Africa’s debt rating one notch from A3 to Baa1 on Thursday. The downgrade is largely in response to the continuing political unrest in the country, where the mine strikes are slowly spreading to other industries, choking the economy and revealing the powerlessness of the government.Last fall all three major ratings services lowered their ratings for South Africa, but Moody’s remained slightly higher. The new downgrade puts Moody’s projections in line not only with its pessimistic peers but also with the South African government’s own estimates, as the Wall Street Journal reports:
Finance officials have struggled with the economic impact of the unrest. The South African Reserve Bank last week cut its forecast for economic growth this year to 2.6%, from 2.7%. Reserve Bank Governor Gill Marcus said that besides the slower economy, potential wage increases could spur inflationary pressure.What’s more, lower tax revenue from weak mine production could endanger the government’s ability to boost growth through big investments in infrastructure, including $37 billion in road, railway and port upgrades that President Jacob Zuma announced in February.
The South African government has assured us that its programs to spur growth will continue as promised, but Moody’s believes that this won’t happen before the ANC’s December congress, when President Zuma is up for reelection as leader of the party.Unfortunately, Moody’s may be right. The government has thus far proved unable to deal with the mining strikes or the masses of unemployed angry youth, and the unrest is beginning to become a major drag on the economy. When left untreated, these problems tend to get worse, not better.