/ 10 November 2008

SA says economy sound despite Fitch outlook cut

South Africa's Treasury said on Monday its economy was sound and it was confident its debt ratings would not be downgraded.

South Africa’s Treasury said on Monday its economy was sound and it was confident its debt ratings would not be downgraded despite Fitch cutting its outlook for the country.

Fitch cut South Africa’s outlook to negative from stable as part of a wider review of 17 major investment-grade emerging market economies.

This followed a drop in the outlook from positive in June.

Fitch said the world’s largest economies were facing a recession that could match those of the early 1980s and 1990s in severity, casting doubt on how less developed economies can adjust, even if some look more robust than in previous times of turmoil.

On South Africa it said, ”…. the current account deficit in excess of 7% of GDP, which is largely funded by portfolio flows, means the risk of a ‘hard landing’ and even recession has increased significantly given the expected reduction in capital and financial flows to emerging markets”.

The Treasury said the country’s low debt ratio, large cash holdings and significant foreign exchange reserves helped cushion the economy during times of global turbulence.

”South Africa is confident that it would not be downgraded during this period as our economic fundamentals are sound, our policies are robust and our economic institutions vigilant,” it said in a statement.

Projections for growth, revenue and inflation already took into account all the factors that had been raised by Fitch, it said.

It also said its banking system was solid and the government had not needed to support the sector due to sound regulation, good adequacy ratios and sufficient liquidity.

The rand has weakened more than 30% against the dollar this year, stung by global risk aversion and concern over the financing of its current account shortfall that stood at 7,3% of GDP last year.

Room to spend
The Treasury has cut its forecast for economic growth to 3,7% this year and 3% for 2008, down from the average of 5% recorded over the past four years, partly due to slower world growth.

”Economic growth is expected to moderate in 2009 compared to the last three years, as export returns slow and household consumption remains weak.”

However, it said the government’s fiscal position was sound, leaving room to offset further economic weakness if required.

Consumer spending has cooled sharply following a total five percentage points in rate hikes between June 2006 and June 2008 to try tame inflation.

Inflation appears to have peaked and analysts forecast rate cuts in 2009.

The Treasury reduced the forecast for the budget surplus for 2008/09 in its medium-term budget last month, and predicted a deficit of 1,6% of GDP for 2009/10, before easing again.

The Treasury said while more public borrowing may be needed over the next three years, partly to help utilities such as power firm Eskom fund upgrade programmes, the rise in debt was small.

Annual debt costs were seen continuing to fall to below 2% of GDP, while the current account deficit may also moderate given the sharp fall in the price of oil, it said.

Fitch puts South Africa’s long-term foreign currency rating at ”BBB+” its long-term local currency rating at ”A”. – Reuters