File picture: Denis Farrell

Johannesburg - South Africa faces the prospect of paying a higher premium on its sovereign debt after Fitch and Standard and Poor's review of its credit rating on Friday, with downgrades on the cards as lacklustre economic growth points to weak revenue this year.

The economy contracted in the first quarter of 2014, a decline last seen during a recession five years ago, after mining output plummeted due to a 20-week old strike that has hit the world's three largest platinum producers.

The rand has fallen as much as 2.2 percent against the dollar from Monday's peak, as skittish investors brace for “Friday the 13th”, when the agencies give their verdict on a country recently toppled by Nigeria as Africa's biggest economy.

S&P and Fitch, together with peer Moody's, all downgraded Pretoria in the aftermath of another wave of violent labour protests in 2012 which culminated in police shooting dead more than 30 striking miners.

S&P's long-term foreign currency rating on the country is presently at BBB, while the local currency rating is at A- with a negative outlook.

Fitch has placed South Africa at BBB and BBB+ for long-term foreign and local currency respectively, with a stable outlook.

“We see material risks of both agencies moving to a more negative stance on the sovereign,” Standard Bank said in a note, adding that the rand might have fully priced in these moves thanks to new regulations compelling agencies to alert markets to upcoming reviews.

South Africa still enjoys investment grade rating from the three agencies because of its liquid financial markets and prudent fiscal policies even as it tries to recover from the 2009 recession.

But investors are worried that President Jacob Zuma, re-elected for a second five-year term last month despite rising discontent among his working class support base, might loosen the purse strings to boost the flagging economy and create much-needed jobs.

Fitch and S&P could however offer Zuma's new government a temporary reprieve until later in the year, when Finance Minister Nhlanhla Nene delivers his maiden interim budget.

“The agencies may stall a downgrade for now in order to see whether South Africa's fiscal consolidation plans remain intact come the October medium-term budget,” BNP Paribas economist Jeffrey Schultz said.

“They might also want to give the new cabinet time to show that it is up to the challenge of helping to push forward the country's national development plan.”

In the meantime, news that the longest strike in the 130-year history of South Africa's mines could soon break with a possible wage deal, is not likely to sway Friday's ratings decision either way.

“It does not change the fact that South Africa may have a labour relations issue that could cloud the growth outlook that has impacted on investor confidence in the country,” said London-based Standard Chartered economist Razia Khan.

“What the ratings agencies will be focused on are the structural issues in South Africa. It's the medium to long term, and the day-to-day news flow doesn't change that.” - Reuters