The global credit ratings agency also affirmed South Africa’s long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' and 'BBB+', respectively.
“The outlook for GDP growth has deteriorated. Real GDP contracted by 0.6 per cent (quarter on quarter, seasonally adjusted annualised) in the first quarter of 2014, reducing the year on year rate to 1.6 per cent,” Fitch Ratings explained.
“This partly reflects the long strike in the platinum sector, but manufacturing output also fell sharply. Increased strike activity, high wage demands and electricity constraints represent negative supply side shocks. So far, the sharp depreciation of the rand over the past two years has not fed through to clear signs of improvement in competitiveness and growth.”
The issue ratings on the senior unsecured foreign and local currency bonds have also been affirmed by Fitch at 'BBB' and 'BBB+' respectively. The Country Ceiling has been affirmed at 'A-' and the Short-term foreign currency IDR has been affirmed at 'F3'.
(READ MORE: Economic indicators suggests S.Africa's economy is slowing down)
Fitch has also affirmed the common Country Ceiling of the Common Monetary Area of South Africa, with Lesotho at BB-, Namibia at BBB- and Swaziland, which is not rated, at 'A-'. These affirmations are in line with South Africa’s Country Ceiling.
“Following its election victory in May with 62 per of the vote, the African National Congress government faces a challenging task to raise the country’s growth rate and improve social conditions, which has been made more difficult by the weaker growth performance and deteriorating trends in governance and corruption,” said Fitch.
“This will require an acceleration of structural reforms, such as those set out in the comprehensive National Development Plan (NDP). In Fitch's view, the track record of some key ministerial appointments and shortcomings in administrative capacity mean this is subject to downside risks.”
(READ MORE: The changing global preception of S.Africa)
South Africa’s inflation has been higher than in rating peers in the five years to 2013, and consumer price inflation rose to 6.1 per cent in April, breaching the South African Reserve Bank's 3 per cent to 6 per cent target.
Fitch added that South Africa’s current account deficit, which was 5.8 per cent of GDP in 2013, means that the country’s net external indebtedness is also rising. The deficit, according to the agency, also leaves the country exposed to shifts in global liquidity and risk appetite.
South Africa's National Treasury released a statment after Fitch's affirmation, explaining their aims to improve the country's regulatory environment and reduce shortage skills.
“Fitch’s concerns about growth arise partly from the strike that has affected part of the mining sector. Efforts to bring an end to the strike continue and government has called on all parties to seek an end to the deadlock,” the National Treasury said.