The Japanese based credit rating agency said that South Africa’s economy has decelerated since 2012 due to a global economic slowdown and a subdued resource boom while its current account deficit has increased. The country also continues to face a wide wealth disparity.
However, its credit outlook remains stable as South Africa is still one of the world’s leading mining countries and has a prominent economic position in Africa with well-developed manufacturing and service industries.
“Nevertheless, it should take time before the economy is back on a solid growth path through the steady expansion of domestic economic activities. Besides, there are potential impediments to growth, such as re-emergence of large-scale strikes and disruptions in power supply,” said R&I in a statement.
The agency added that the government’s Medium Term Budget Policy Statement (MTBPS) announced in October this year by finance minister, Nhlanhla Nene, lowered the country’s growth forecast for 2014 from 2.7 to 1.4 per cent.
Factors to blame for the downgrade include the large-scale strikes by platinum miners between 2012 and 2014
“Workers’ poor living conditions are believed to be an underlying cause of such strikes however these events are also a manifestation of deep-rooted social challenges in South Africa. In that sense, one should bear in mind that similar detrimental events could occur, remaining as a risk to economic growth going forward,” said R&I.
(WATCH VIDEO: Understanding S.Africa’s credit rating downgrade)
In response, South Africa’s government said that despite the downgrade, R&I’s credit rating remains the highest investment grade rating for the country.
“R&I’s announcement must be seen in the context of a challenging economic climate both domestically and internationally. The rating agency’s decision to maintain a stable outlook on the sovereign rating is a sign of confidence in our macroeconomic policy stance,” said the government.
“In this regard, continuity of our fiscal and monetary policies over the years has created a climate of predictability and transparency.”
(READ MORE: Fitch cuts S.Africa’s debt outlook)
The government also believes that the MTBPS addressed the major concerns raised by investors in the current economic environment.
“The cost reduction and revenue supporting initiatives announced in the MTBPS are testament to Government’s commitment to making the bold decisions that are needed to keep South Africa on a sustainable fiscal path.”