Fitch upgrades SA’s ratings outlook

19 January 2011

International credit ratings agency Fitch Ratings has revised South Africa’s outlook from negative to stable, citing improved economic growth prospects, increased spending in key areas by companies like Eskom and Transnet, and a narrowing current account deficit.

At the same time, the agency has affirmed South Africa’s long-term foreign currency issuer default ratings (IDR) at “BBB+”, its long-term local IDR at “A”, and its short-term foreign currency IDR at “F2”. The agency has also affirmed the country ceiling at “A”.

“South Africa’s post-global crisis adjustment process has been smoother than originally thought, and the economy is emerging from the global recession with its credit fundamentals roughly in line with or slightly better than rated peers,” Fitch Sovereign Group director Veronica Kalema said in a statement this week.

After falling to 1.7% in 2009, Fitch expects South Africa’s real gross domestic product (GDP) growth to have recovered to 2.8% in 2010 – a slightly faster recovery than originally projected by the government – while medium-term budget deficits and debt ratios have also been revised downwards.

Eskom investment ‘critical’

Spending by key state-owned infrastructure companies Eskom and Transnet will continue to provide a stimulus to the economy, Fitch says, adding that the ability of local capital markets to finance wider deficits with relative ease emphasises a key rating strength of South Africa.

The public debt ratio is projected to stabilise at 41% of GDP in the 2012/13 financial year, in line with the median for the “BBB” category.

Due to lower-than-requested tariff increases sanctioned by the country’s utility regulator, the government increased the Eskom guarantee facility to R350-billion (13.4% of 2010 GDP) from R176-billion.

Fitch estimates the debt of the broader public sector to reach just below 60% of GDP in 2013/14 as the guarantee is drawn down.

“The facility is chiefly to enable the company to borrow at reduced cost to complete two major power stations,” Fitch said. “The risk of the government being called to pay out on Eskom’s guarantee facility is, in Fitch’s opinion, fairly low.

“Investment by Eskom is critical to easing structural constraints on higher growth potential and is positive for creditworthiness.”

Monetary policy supporting recovery

According to Fitch, monetary policy is supporting South Africa’s economic recovery – following a significant fall in inflation to close to the lower band of the inflation target owing to a strong currency and lower global inflation, interest rates in this economic cycle have been cut by 650 basis points to 5.5%.

Imbalances in the country’s economy continue to improve, as the current account deficit narrowed to around 4% of GDP in 2009, and is expected by Fitch to remain around this level for 2010.

South Africas deficit has been more than covered by strong portfolio inflows – mainly equities in 2009 and then debt in 2010 – owing to strong emerging-market investor sentiment. Consequently, the currency has strengthened since March 2009.

Fitch adds that portfolio debt inflows during 2010 came increasingly from pension funds, and so should be less volatile in the event of a reversal in emerging-markets investor sentiment.

“Under the New Growth Path, the government is taking a new approach by involving dialogue with all major stakeholders to collectively address the challenge of high youth unemployment and raise growth,” Fitch said. “Success in this area will be important for the ratings.

“Structural issues in the areas of energy and transport infrastructure and labour markets continue to weigh on the ratings and, if not successfully addressed, will be become more negative for the ratings over time.”

SAinfo reporter

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