(The following statement was released by the rating agency)
Jan 13 – Fitch Ratings has affirmed South Africa’s Long-term foreign and local currency
Issuer Default Ratings (IDR) at ‘BBB+’ and ‘A’ respectively. The Outlooks on the Long-term IDRs
have been revised to Negative from Stable. Fitch has simultaneously affirmed South Africa’s
Short-term IDR at ‘F2’ and Country Ceiling at ‘A’.
“The Negative Outlook reflects the limited progress on several long-standing
structural issues that have over time caused South Africa’s economic performance
to fall behind its peers,” says Purvi Harlalka, Director in Fitch’s Sovereigns
group. “Not least of the problems that require urgent attention is the economy’s
inability to create sufficient jobs for its labour force. This inability has not
only constrained growth and kept the tax base narrow but has also caused public
finances to become increasingly redistributive in an effort to address the lack
of social mobility. The resultant narrowing of fiscal space undermines a key
support to South Africa’s creditworthiness,” adds Ms Harlalka.
GDP growth has averaged 2.7% over the past five years, compared to a ‘BBB’ peer
group average of 3%. The gap in per capita growth is even wider. Estimates of
potential growth have been revised down to around 4% and such a pace is unlikely
to be achieved in the next few years without an acceleration of structural
reforms. The employment rate is a low 40% and unemployment stuck at 25%. The
political challenge presented by these issues will increase over time.
South Africa’s public finances, though still a rating strength, are no longer
such a stand out strength compared to peers. Fiscal space has been used up in
the recession. By Q113, the budget deficit will have averaged 5% of GDP for four
years running and debt will have risen to 42% of GDP, where it will be in line
with the ‘BBB’ median but 1.6x higher than in 2008 and back up to levels last
seen in fiscal year 1999/2000 (FY00), when South Africa’s rating was two notches
lower. In Fitch’s view, the higher debt level, together with the fact that the
wage bill and social transfers consume 52% of the budget, has substantially
reduced the fiscal room available to South Africa to counteract any significant
economic shocks.
Although they remain better than peer medians, South Africa’s external finances
are also deteriorating. In 2010 South Africa became a net external debtor,
albeit a small one (1.3% of GDP), from having been a net external creditor
during 2004-2009. The increase in external indebtedness reflects the fact that
South Africa’s current account has been in deficit since 2004 despite the fact
that there has been a commodity price boom for most of this period. The saving
ratio is relatively low and foreign direct investment (FDI) has averaged just
1.5% of GDP over this period. The current account deficit (CAD) is set to widen
to 4.4% of GDP in 2012 from 4% in 2011 and 2.8% in 2010, following a weakened
outlook for exports, so the increase in net debt will continue. However, the CAD
is unlikely to reach the 7% of GDP levels recorded in 2007 and 2008 due to a
slowdown in consumption.
South Africa’s ‘BBB+’ rating remains underpinned by the strength of its
institutions relative to its peers. These include a robust macroeconomic and
regulatory framework, an independent and objective judicial system, and able
governance. The resulting favourable business climate has enabled the
development of a sophisticated corporate and financial sector. The depth and
liquidity of the latter has enabled South Africa to borrow mainly in its own
currency – 90% of government debt is rand denominated – which is a key rating
strength.
South Africa’s macroeconomic framework derives important strength from the
credibility of the South African Reserve Bank (SARB), which has successfully
managed inflation down over the last decade. Inflation will exceed its target
range (3%-6%) in 2012 but in Fitch’s view that owes partly to exogenous factors
like food and administered prices and does not diminish the SARB’s inflation
fighting credentials. However, inflation is typically higher than in peers as is
exchange rate volatility, the latter due to portfolio flows. Despite this,
domestic confidence in the currency is high as evident in the low dollarisation
of contracts. The sound financial system is also a rating strength.
Political noise has increased in recent months and is set to continue this year.
However, Fitch sees the threat of nationalisation – a key focus of debate – as
being remote. Although the African National Congress (ANC) has historically
favoured a large role for the state, it is unlikely to expropriate assets.
However, its entertaining of the nationalisation debate has upset investor
confidence. ANC policy towards this issue will only be clarified in the wake of
the policy conference in May 2012. Any move to nationalise mines would adversely
affect the business climate and have immediate and negative consequences for the
rating.
Failure to accelerate growth and make it more labour-intensive on a sustained
basis will gradually weaken South Africa’s credit fundamentals and have negative
implications for the rating. Conversely creditworthiness would benefit from
structural reforms that increase growth and employment prospects. High
unemployment already fosters widespread criminal violence and deters foreign
investment. Over time it could also threaten social and political stability,
damaging the investment climate further.
Further increases in spending, especially the wage bill or social transfers,
will limit South Africa’s already diminished fiscal space. It will also push up
debt and the interest bill to levels beyond those commensurate with its current
rating.
