Rand, bonds lose ground

Moody's has lowered its outlook on South Africa's ratings, voicing concern that political pressure from unions and black voters wanting greater economic redress for the ills of apartheid could erode the country's finances.

Moody's cut South Africa's A3 rating outlook to negative from stable and said there was "growing risk that the political commitment to low-budget deficits and the ability to keep within current debt targets could be undermined by popular pressures".

In its three-year policy framework unveiled last month, the Treasury said the budget deficit for this year would be higher than previously anticipated at 5.5%, and weak growth would result in lower revenues.

The rand extended its losses after the downgrade, falling more than 2.2% to a session low of R7.9888 against the dollar.

Government bonds also weakened, with the yield on the 2015 bond up 11.5 basis points to 6.485% while that on the 2026 note climbed 12 basis points to 8.30%.

Fiscal accounts were in surplus for two years before a 2009 recession but swung into deficit as the government spent more to counter the effects of a global slowdown. More than one million people lost jobs in the recession, and a quarter of the labour force is jobless. Millions of the poor are becoming increasingly disillusioned with the government of the ANC, raising the risk of social instability.

The government has said the economy needs to grow by an average 7% a year - more than double the 3.1% expected in 2011 - to make a dent in unemployment.

Moody's said the unemployment rate was likely to remain high.

It said the ANC's "unwillingness to definitively reject demands from certain segments of the political spectrum for more activist policy interventions was harmful to South Africa's economic prospects".

Investors have been unsettled for two years by talk from the ANC's youth wing of nationalising mines. The ANC has said nationalisation is not government policy, but it has not dismissed it out of hand.

Standard & Poor's regional head Konrad Reuss said the company was comfortable with its BBB+ rating - lower than Moody's.

"The key issue is that there are no signs at this point that the government is changing direction with regards to its long-term policy of pursuing a sustainable fiscal policy," Reuss said.