International ratings agency Fitch Ratings on Thursday upgraded South Africa’s long-term foreign-currency rating to “BBB+” from “BBB” and short-term to “F2” from “F3”.
The long-term local-currency rating has also been upgraded, to “A” from “A-“. The outlook for the ratings is stable. The country ceiling has been upgraded to “A-” from “BBB+”, Fitch said in a statement.
Fitch said the upgrade reflects an improvement in South Africa’s growth performance and a further strengthening of its external balance sheet, resulting from a sizeable build-up of official reserves.
Fitch estimates that South Africa will be a net external creditor by the end of 2006.
“South Africa’s growth performance during the past two years has exceeded expectations. The entrenchment of macroeconomic stability as well as increased public investment and other ongoing supply side reforms have improved prospects for sustained higher growth averaging around 4% over the medium term,” said Veronica Kalema, Fitch’s lead sovereign analyst on South Africa.
External credit indicators continue to strengthen as a result of ongoing and sizeable build-up of official reserves. Gross official reserves, currently $19-billion, increased by $11-billion between February last year and July this year.
Net external debt ratios have fallen rapidly, from 17% of gross domestic product (GDP) and 47% of current external receipts (CXR) in 2002 to a projected 1% of GDP and 2% of CXR at the end of 2005, well below the “BBB” median.
Due to a further accumulation of official reserves, South Africa is likely to become a net external creditor for the first time in 2006, which means that reserves and other banks’ foreign assets (liquid foreign assets) will more than cover its gross external debt — an important rating strength.
Net public debt ratios have also converged towards the peer group norm and are in low single digits. Thus, the public sector should in the next two to three years also become a net external creditor.
South Africa is expected to post economic growth of more than 4% this year, following on from higher-than-expected growth of 3,7% in 2004 benefiting from a stronger macroeconomic environment and a relatively favourable global environment. Rising real incomes and strong lending growth have further fuelled consumer spending.
“In Fitch’s view, some of these factors are temporary or will taper off. However, over the medium term the substantial increase in public investment and restructuring of key public enterprises should help underpin growth at the higher level,” it said.
Growth is unbalanced, however, driven primarily by domestic demand and resulting in a widening of the current account deficit, projected at more than 3,5% of GDP (high by South African standards) over the medium term, and which — apart from this year when South Africa will receive a large FDI inflow from Barclays Bank’s acquisition of Absa — is largely covered by potentially volatile capital inflows.
The more robust monetary and exchange-rate regime suggests a more orderly adjustment of the exchange rate in the event of a reversal in capital inflows emanating from a variety of exogenous factors. But this area remains a key vulnerability to South Africa’s macroeconomic outlook, it added.
South Africa’s sound and transparent public finances remain a key rating strength. Public debt has stabilised at around the “BBB” median range level — 36% of GDP — and deficits are sustainable at about or just below 3% of GDP, despite a renewed emphasis on infrastructure spending, helped by very buoyant revenues.
High investment by public corporations will result in an increase of debt of the broader public sector by just 1,8% and is very manageable.
Fitch notes that black economic empowerment seems to have been managed without any serious disruptions to the economy thus far, and has contributed to the growing black middle class and thus to economic growth and social stability.
But, additional structural reform, including reform of the labour markets, improving education and training, and the regulatory environment will be needed to encourage more investment and growth and alleviate South Africa’s unique socio-economic problems, including high unemployment, income inequality and HIV/Aids. — I-Net Bridge