SA dodges Fitch downgrading bullet

South Africa dodged an expected downgrade from ratings agency Fitch late on Friday, contrary to the views of experts who had widely expected it to slash the country's credit rating.

This respite followed a decision earlier in the day by Standard & Poor's (S&P) to also keep South Africa's rating unchanged - good news amid a series of power outages that have soured the national mood.

Before the announcements on Friday, the rand plunged to a six-year low against the dollar of R11.72 to the dollar, while the JSE hit seven-week lows as markets expected the worst.

Earlier, analysts from Societe Generale SA told Bloomberg that "we expect Fitch to downgrade (South Africa) amid worsening government finances", while others agreed, citing the "worrying lack of growth".

But just before midnight on Friday, Fitch said it would not downgrade South Africa, even though it kept a "negative outlook". Nonetheless, Fitch warned that economic growth "has been persistently weak relative to expectations" - partly because of the electricity supply constraints at Eskom and strikes in the platinum and manufacturing sectors.

While Fitch slashed its GDP growth forecast for South Africa to 1.5%, it also said that "structural reforms, such as those identified in the National Development Plan (NDP), are necessary to raise growth".

A few hours earlier, S&P said that while it would not slash South Africa's rating again after doing so earlier this year, it was worried about Eskom's blackouts and poor growth.

S&P analyst Ravi Bhatia said: "At the core, this is a story of poor growth, which was part of the reason for our downgrade earlier this year. And if there's no electricity, this hampers growth and creates a knock-on effect," he said.

While S&P expects South Africa's GDP growth this year to be 1.4%, it anticipates that this will improve to 2.5% next year and 2.9% the next, "based on fewer and shorter strikes, and increases in electricity supply and consumer demand".

Strikes remained a headache. Bhatia said: "Industrial action is a major factor. The reason the growth numbers were knocked out in 2014 was largely due to the strikes in platinum earlier this year."

Still, S&P is buying Finance Minister Nhlanhla Nene's story that he is curbing government spending. "Generally, Treasury has done pretty well controlling expenditure," said Bhatia.

One policy initiative that has floundered thanks to political wrangling in the ANC is the NDP, which has yet to be properly implemented.

The ominous warnings from the ratings agencies came as the International Monetary Fund (IMF) made it clear it believed South Africa would fall short of the NDP's targets for growth and unemployment.

Although a weak global backdrop was a factor, power cuts and tense industrial relations were holding back growth and job creation, it warned. "The outlook remains lacklustre. Downside risks prevail," it said in its Article IV report.

The economy's "potential" growth rate had fallen to 2.25%-2.5% since 2010, down from an average of 3.5%-4% from 2000 to 2008, the report said.

"If the economy grows at the current potential level of 2.5%, only 1.7million jobs would be created by 2020, well below the objectives set out in the NDP, with unemployment still in the range of 21% to 22%, it noted.

The NDP aims to cut the unemployment rate - now 25.4% - to 14% by 2020 and generate 11million jobs by 2030, which would reduce it to 6%. It says growth of 5.4% will enable the country to achieve those goals.

Figures released earlier this week showed that the formal, non-farm sector of the economy shed 129000 jobs in the third quarter.

"We are definitely going to miss that jobs target - growth is too weak," said Nedbank economist Isaac Matshego.

Higher energy availability would lead to improved overall production and encourage investment, the IMF said. Days lost due to strikes had to be reduced while structural reforms were needed in the labour market.

"It's sound advice from the IMF - the same points are being made every year, the government says we're aware of this, but nothing much happens," said NKC senior economist Christie Viljoen. A key problem was that unions provided so much support to the ANC that substantial labour market reform was unlikely, said Viljoen.