Rationale
The negative outlook reflects the potential for a downgrade if economic and social problems
feed into the political debate in the run-up to the 2014 national and provincial elections and
consequently further put pressure on the policy framework.
We consider that South Africa’s near-term political pressures have diminished since the
African National Congress (ANC) has put the leadership of its youth league, which advocated
nationalization of the country’s mining sector, through a disciplinary process. We also think
that South Africa’s Treasury remains committed to further gradual fiscal consolidation,
stabilizing its debt levels that have grown strongly since 2009.
However, fundamental structural economic and social problems, such as low per capita growth
estimated at 2.1% in 2012 and very high unemployment rates, persist, and South Africa’s
structural current account deficit makes the economy dependent on external financing.
Draft policy documents expected to be discussed ahead of the ANC national conference in
December 2012 support our expectation that there will be no abrupt shift in the party’s
policies, despite continued debates ahead of the conference. This is because of the party’s
checks and balances, the allocation of key positions to the centrist wing, and the economy’s
exposure to market sanctions. Nevertheless, we think that looming economic and social pressures
could gradually affect the country’s policy framework. In the run-up to the 2014 elections, the
ANC’s centrist wing may make gradual concessions to the more populist expectations from within
and without the party.
Deterioration in the global economic environment could add pressure given that exports of
goods and services amount to about 30% of GDP and that the country runs persistent current
account deficits, which we estimate will be about 4% of GDP in 2012. We expect that nearly
one-half of the current account deficit will be funded by net foreign direct investment, and the
other half through an increase in external debt, as was the case in 2011. This is because
portfolio equity continues to be a net outflow.
Standard Poor’s ratings on South Africa are supported by our view of the country’s stable
political environment and transparent institutions. Its moderate fiscal and external debt afford
South Africa fiscal and monetary flexibility, as seen in the country’s successful use of
macroeconomic policies to cushion the burden of the recent global economic downturn.
The ratings are constrained by South Africa’s multiple development needs and social
challenges, which we think may have long-term ramifications for policy and may raise fiscal
expenditure pressures. Supply shortages–includinginfrastructure bottlenecks and labor market
rigidity and skill shortages–constrain South Africa’s growth potential.
Continued…
