Fitch Ratings-Hong Kong/London-19 June 2017: The revision to rules applying to South Africa's mining sector supports our view that the direction of economic policy has changed following March's cabinet reshuffle, Fitch Ratings says. It indicates that the government is prioritising radical transformation even if this leads to weakening of the business climate and could reduce trend growth.
The new Mining Charter announced last week will require mining companies to raise their black economic empowerment (BEE) ownership slightly, to 30% from 26%, pay 1% of turnover to BEE owners (before any dividends) and meet tough targets for procurement from local and black-owned companies.
BEE is a long-standing feature of South African economic policy, but we think the new charter is the result of a more radical approach. Uncertainty about final outcomes, the implications on returns for existing shareholders of the new provisions, and the challenges of meeting procurement targets will continue to constrain investment in the mining sector, which accounts for about 7% of GDP.
Mining investment has already been hit by the fall in commodity prices, relatively high costs and uncertainty about the new rules. The charter may also weaken business and investor sentiment in other sectors by raising fears of more onerous policies. Business confidence in the second quarter fell to the lowest level since the financial crisis, likely weakened by political developments.
Weaker trend GDP growth than ratings peers, partly due to a deteriorating investment climate, is a key sovereign rating weakness for South Africa. A further weakening in trend growth would make fiscal consolidation more difficult. The authorities aim to reduce the consolidated government budget deficit to 3.1% of GDP in 2017/2018 from 3.4% the previous year but these targets look ambitious in the face of under-performing growth.
Finance Minister Malusi Gigaba, appointed in March's reshuffle, has indicated that further fiscal consolidation measures will be forthcoming. However, in Fitch's view stabilising public finances remains conditional on a recovery in growth. First-quarter GDP contracted by 0.7% quarter-on-quarter in seasonally adjusted annualised terms, the second consecutive quarterly decline, reflecting not just structural weakness but also strong cyclical headwinds. In our latest Global Economic Outlook, published today, we have lowered our real GDP growth forecasts to 0.6% from 1.2% for 2017 and to 1.6% from 2.1% for 2018.
Fitch downgraded South Africa's sovereign rating to 'BB+'/Stable in April, reflecting our view that political events, including the cabinet reshuffle, would weaken standards of governance and public finances. We affirmed the rating on 1 June.