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–including infrastructure bottlenecks and labor market
rigidity and skill shortages–constrain South Africa’s growth potential. The ratings are also
constrained by continuous current account deficits, the funding of which depends significantly
on potentially volatile portfolio flows, exposing the economy to a sudden shift of flows due to
changes in global risk appetite, or to rapid market sanctions in the event of policy slippage.
We consider South Africa to be a middle-income country with a diverse economy but wide
income disparities. We estimate per capita GDP at $7,800 for 2012.
In our view, South Africa’s gradual fiscal consolidation, which targets a general government
deficit of 3% of GDP by 2014, is vulnerable to public sector wage increases and multiple
development needs and social challenges. We anticipate the 2011 fiscal year ending March 31,
2012, will close with a general government deficit of 4.8% of GDP, which is better than
budgeted. The improvement stems in part from underspending on capital projects.
General government debt has approximately doubled since 2008, and the debt burden has risen
by a little more than 10% of GDP. We expect gross general government debt to stabilize at just
under 43% of GDP over the next three years. We estimate gross public sector debt (including
nonfinancial public enterprises) to increase to 52% of GDP at the end of fiscal 2011, and to
further increase to 58% of GDP by 2014, a significant increase compared with 35% in 2008. This
is because of increased borrowing by state-owned entities to address infrastructure gaps.
We estimate the country’s net external liability position will widen to 73% of current
account receipts this year, but the prevalence of equity funding has kept net external debt
(excluding liquid assets) low at an estimated 12% of current account receipts this year. We
expect infrastructure investment to result in a rising external debt burden in the next few
years, but we also expect the country’s export capacity to improve.
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 national and
provincial elections, the ANC’s centrist wing may make gradual concessions to the more populist
expectations from within and without the party.
Continued…
