International ratings agency Fitch Ratings on Thursday revised the outlook on South Africa’s sovereign ratings to Positive from Stable. The ratings are affirmed at long- and short-term foreign at “BBB” and “F3”, respectively. The long-term local currency rating is affirmed at “A-“, Fitch said in a statement.
Fitch said the change in outlook reflects a continued improvement of South Africa’s credit fundamentals over the past year, especially external liquidity and reduced external debt burden. It also reflects the expectation of higher growth over the medium term as the benefits of a strong macroeconomic policy framework are realised.
“An increasingly credible fiscal and monetary policy framework is entrenching macroeconomic stability and the prospect of South Africa sustaining 3+ percent growth. The next few years will tell us whether South Africa 3+ has moved to a higher growth path or not,” said Veronica Kalema, Fitch’s lead analyst on South Africa.
Very strong net capital inflows that have underpinned the strong rand have enabled the South African Reserve Bank (SARB) to build gross and net international reserves to record levels, mitigating a previous constraint on South Africa’s sovereign ratings.
Gross international reserves, currently at about $12,5-billion, up by about $4-billion since the closure of the forward book in February, and more than four times public-sector foreign debt payments due in 2004 should engender greater exchange rate stability and leave South Africa better placed to adjust to external shocks, Fitch added.
Net external debt — total debt owed to foreigners less the foreign assets of the banking system as a whole — is projected to fall to 5% of gross domestic product (GDP) and 20% of current account receipts this year, compared with 17% and 50% respectively just two years ago, and is at the stronger end of the “BBB” rating range.
Nonetheless, international reserves are still relatively low compared with total short-term debt and in relation to foreign holdings of rand debt, and a further accumulation of international reserves by the SARB would be positive for the sovereign rating.
Fitch added that South Africa is expected to post economic growth of about 3% this year and 3,5% in 2005 and 2006, assuming that the global economic environment remains relatively favourable.
Fitch believes that the prospects for sustaining growth above 3% over the medium term have improved, as a result of the greater credibility of fiscal and monetary policies and the entrenchment of macroeconomic stability.
The performance of the economy and its ability to sustain growth against the backdrop of an increasingly uncertain outlook for the global environment will be an important factor influencing South Africa’s sovereign ratings. Additional structural reform, including improving education and training, as well as restructuring of the state enterprise sector is needed to further raise South Africa’s growth potential, although the prospects for additional economic liberalisation are mixed.
“While the strong rand has helped contain inflationary pressures, including those from high oil prices, it is having a negative impact on export competitiveness and the profitability of the mining sector, complicating the conduct of monetary policy.
“The combination of strong import demand and higher oil prices is expected to narrow the trade surplus to its lowest level in several years and underscores the need to maintain prudent fiscal policy and measures to boost domestic savings and investment,” Fitch added.
Despite a more relaxed fiscal policy stance, public debt is expected to stabilise at about 40% of GDP, below the median for “BBB” rating level.
The easier fiscal policy reflects the renewed emphasis on employment creation and economic growth through the expansion of infrastructure and improvements in public service delivery, as well as measures such as creating temporary jobs and training opportunities through the expanded public works programme, which began in April this year as a way of improving employment prospects for the unemployed, Fitch concluded.
Economists react to upgrade
Magan Mistry, economist at Nedcor: “Basically it is expected after the Moody’s announcement. This is positive news for the rand and good news for government’s borrowing programme. Standard & Poor’s is more on the conservative side, but they will probably review as well.”
Chris Hart, economist at Absa: “The Fitch news is excellent, but is behind Moody’s announcement of a review for a possible upgrade of its rating of South African sovereign credit. The Fitch announcement also makes the Moody’s move more credible.
“The Fitch news has had a positive impact on the rand exchange rate. The reason for the change in Fitch’s outlook for South Africa could be because of the very positive picture that is unfolding in the country. Growth is increasing, while the risk assessment is declining.”
Nico Kelder, economist at Efficient Research: “It is obviously positive news for South Africa. But the next serious rating we need is an investment grade rating. Nevertheless, this shows they have confidence in the South African economy and in the country’s leaders. It’s just another positive for the South African economy. It seems these days we just get positive news.”
Rudolf Gouws, chief economist at Rand Merchant Bank: “It is very appropriate that they upgraded us and is in line with indication given by Moody’s earlier this month. It reflects the fact that there is underlying economic growth and credit worthiness, and of course, that the economy is steadily improving. That is good news.” — I-Net Bridge