27 January 2011
Ratings agency Standard & Poor’s has revised South Africa’s outlook from negative to stable, while also affirming its BBB+ long-term and A-2 short-term foreign currency sovereign credit ratings.
The agency expects South Africa’s real gross domestic product (GDP) to increase by 3-4% per annum in the next few years, and believes the government is committed to reducing the general government deficit and containing general government debt accumulation – which is not expected to rise significantly higher than 40% of GDP.
It also expects South Africa’s wider public-sector debt to reach 60% of GDP, while the stable outlook also reflects the view that the country faces significant structural challenges owing to high unemployment rates – currently at about 25%.
“The affirmation of the foreign currency ratings reflects our view of South Africa’s moderate general government and external debt; external financing needs, owing to low national savings rates and current account deficits; and the government’s commitment to reducing the general government deficit and containing debt accumulation,” Standard & Poor’s credit analyst Christian Esters said in a statement this week.
Rising public sector debt, low savings
At the same time, the long-term local currency sovereign credit rating on South Africa was lowered to A from A+, and the short-term local currency sovereign credit rating affirmed at A-1, with a stable outlook. The country’s transfer and convertibility assessment is unchanged at A.
According to Standard & Poor’s, the lowering of the local currency rating reflects a narrower gap between South Africa’s creditworthiness in terms of foreign and local currencies.
“This is because we consider that South Africa’s fiscal flexibility has decreased, owing to rising public-sector debt, including non-financial public enterprises,” the agency said.
Standard & Poor’s also considers that South Africa’s monetary flexibility is constrained by low domestic savings and the country’s dependence on external financing through volatile portfolio flows, which have led to an increasing stock of portfolio assets belonging to non-residents.
External debt ‘to remain manageable’
Standard & Poor’s adds that the funding needs of South African government-related entities are increasing, and the agency expects the public-sector borrowing requirement – including non-financial public enterprises – to reach 9.7% of GDP as of the fiscal year ending March 31, 2011.
Although South Africa’s current account deficits remain financed by volatile portfolio flows – with current levels lower than those before 2009 – the agency expects the country’s external debt to remain manageable.
The South African financial sector appears strong and relatively unaffected by the global turmoil, the agency says, adding that its capital markets are well developed, and that portfolio inflows are fuelled by the positive yield differential between South Africa and developed markets.
“The outlook is stable, because we expect South Africa’s external balance sheet to remain manageable, despite volatile portfolio flows, with gross external debt at about 20% of GDP,” said Esters. “At the same time, we expect a moderate growth of wages and social welfare expenditure to support a gradual reduction of South Africa’s general government deficit over the next few years.”
Future ratings outlook
Standard & Poor’s says the ratings could be lowered if the pace of South Africa’s public-sector debt accumulation exceeds its current expectations, or if the increase in public sector debt is not offset by an improvement in investment and economic growth prospects.
“We could also lower the ratings if risks associated with volatile portfolio flows lead to pressure on South Africa’s balance of payments,” the agency said.
Although unlikely in the short to medium term, the ratings could be raised if South Africa’s dependence on portfolio flows to finance its current account deficit were to decrease substantially and its fiscal performance and debt levels improve significantly, supported by higher economic growth rates.
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