Fitch: South African Corporate Growth Constrained By Muted Recovery
Fitch Ratings-London/Johannesburg-10 May 2011: Fitch Ratings says that it expects prospects for the manufacturing, construction, and transport sectors of the South African economy to continue to be constrained by weak demand, rising domestic costs and the continued strength of the South African Rand (ZAR).
"The challenges facing South African corporates as a result of the difficult operating environment certainly limits the rating upside, in Fitch's view," says Roelof Steenekamp, Director in Fitch's South African corporate team, "Confidence in a corporate's ability to generate sustainable cash flow to service debt is a critical component of the rating analysis."
Structural weaknesses in consumer confidence, spending and credit growth caused by high levels of unemployment and the low level of consumer savings will constrain South African corporate issuers' operating margins and cash flow generation in 2011 and 2012. Additionally, weakened domestic and international demand since early 2009, as well as significant input cost increases mean that many corporates operating in South Africa are expected to continue to face some degree of operating pressure.
Strong commodity prices are masking the challenges faced by the mining industry in South Africa pertaining to the strong exchange rate and rising domestic costs. The strength of the ZAR since 2010 is also continuing to negatively impact exporters in the manufacturing industry, especially where rising input costs have been primarily in the local currency (monthly average ZAR/USD exchange rate strengthened to 6.73 in April 2011 from 10.01 in February 2009).
Ongoing above-inflationary wage demands by labour unions, a severe shortage of skilled workers, along with significant electricity tariff increases expected over the next four years (to 2015), will remain a challenge for many companies. South Africa remains vulnerable to a renewed bout of electricity supply disruptions until new generation capacity is expected to be commissioned from 2013 onwards.
A recent announcement by Statistics South Africa stated that the unemployment rate increased to 25% in Q111 from 24% in Q410, with the highest number of jobs losses recorded in the transport, construction and agricultural sectors.
Contact:
Malcolm Murray
Analyst
+27 11 290 9408
Fitch Southern Africa (PTY) Ltd
23 Impala Road
Chislehurston
Sandton, 2196
Roelof Steenekamp
Director
+27 11 290 9403
Karabo Matentji
Analyst
+27 11 290 9410
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.
Additional information is available at www.fitchratings.com.