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Labour dispute highlights structural problems, Fitch warns

Rating agencies Fitch Ratings and Moody’s Investors Service have voiced their concern on the implications of the deadly labour dispute in the mining sector.

Fitch said on Friday: “The violent protests at the Marikana platinum mine… partly reflect factors peculiar to the platinum sector. Nevertheless, the protests highlight broader structural problems that have long weighed on South Africa’s rating.”

Last week, Konrad Reuss, the managing director of rating agency Standard and Poor’s (S&P) in South Africa, also expressed concern.

Credit ratings determine a country’s cost of debt – the lower the rating the higher the interest bill.

Fitch said while the protests alone did not directly affect the sovereign rating, they highlighted structural problems.

On the same note, Moody’s said on Friday it saw the resurgence in labour unrest in the country’s platinum sector as a credit negative development for Anglo American.

The agency added that the labour situation in South Africa would make it hard for Anglo American to turn around its underperforming platinum unit.

Moody’s said there were strong indications that essential substantial restructuring might include closure of unprofitable mines and the reduction of headcount to cut costs and restore the division’s profitability to more sustainable levels.

“We are particularly concerned that the increased levels of industrial action, as evidenced most recently by the violent strike at Lonmin’s Marikana mine, which initially began as a disputed over pay, could make it more challenging for Anglo American to restructure its platinum business in a timely and effective manner,” the agency said.

Commenting on South Africa’s mining, Fitch said: “Underinvestment and poor performance has seen employment in the sector fall by 131 000 jobs since 2001, at a time when surging commodity prices encouraged large-scale investment in other mining jurisdictions.”

And it noted, by failing to capitalise on the commodity boom, the country missed an opportunity to increase government and export revenue and to fast-track development.

Fitch said it would examine the issue in more detail in a special report on global mining to be published later this year.

In January, Fitch changed the outlook on its BBB+ South Africa rating from stable to negative, which means the next move would probably be down. It cited “limited progress on some long-standing structural issues”. Moody’s and S&P also changed the sovereign outlook to negative. S&P has the country on BBB+ and Moody’s on A3.

The structural problems, according to Fitch, include policy uncertainty, particularly in the mining sector. It also cited “lack of progress on education and labour reforms which, as acknowledged by last year’s National Development Plan, has resulted in insufficient growth to create the jobs required to put a dent in an unemployment rate of 25 percent”.

These factors, combined with “diminished fiscal space, formed the basis for Fitch’s decision to put South Africa’s BBB+ rating on negative outlook earlier this year”. Fitch warned that failure to speed up growth and sustain the creation of jobs would weaken South Africa's credit fundamentals. Additional reporting by Nompumelelo Magwaza

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