By Alicia Perez - Two major credit ratings agencies dealt South Africa's financial credibility severe setbacks Friday, a day after negotiators for striking workers and mining companies agreed in principle to end the resource-rich nation's longest mining strike.
The head of the Association of Mineworkers and Construction Union (AMCU) said late Thursday an agreement in principle had been reached with three platinum producers whose output has been severely curtailed for nearly five months.
"What was decided today is to accept the offer in principle," AMCU President Joseph Mathunjwa on Thursday told the South African Broadcasting Corp. "Based on some of the issues that still need to be ironed out by the employers ... of which it's quite a break-through and those issues I don't think are the milestone. It’s something that can be sorted out and surely the agreement is eminent. There are six points that have been raised, of which I believe that the mine will be able to iron out those issues."
Hours later Fitch Ratings cut its outlook for the nation's economy to negative, a move that indicates Fitch is close to downgrading its rating of South Africa's credit. Fitch rates the country's foreign-currency debt at BBB.
"The outlook for GDP growth has deteriorated," Fitch said in a statement. "Real GDP contracted by 0.6 percent (quareter over quareter, seasonally adjusted annualized) in the first quarter of 2014, reducing the year-over-year rate to 1.6 percent. 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."
Shortly after Fitch's move, Standard & Poor's lowered South Africa's long-term foreign currency sovereign credit rating to just above "junk" level, also citing the strike against Anglo American PLC LON:AAL, Impala Platinum Holdings Ltd. (JSE:IMP) and Lonmin PLC LON:LMI.
"The downgrade reflects our expectation of lackluster GDP growth in South Africa, against a backdrop of relatively high current account deficits, rising general government debt, and the potential volatility and cost of external financing," S&P said in a statement.
Thursday's breakthrough in labor negotiations reflected three weeks of intense work by officials on both sides, Mineweb.com said. Before the strike, which began Jan. 23 and affected about 70,000 workers, can end assorted issues must be resolved. Among those issues are length of contract, back pay and reinstatement of jobs.
Financial analysts hailed the breakthrough.
"Although another breakdown in talks cannot be ruled out with certainty, the biggest hurdles now seem to be behind us and we would expect a formal offer to be presented and accepted soon," a UBS note released Friday by Edel Tully and Joni Teves stated.