South Africa’s public finances and economy have improved sharply but it faces severe challenges such as HIV/Aids and high unemployment which hold back a ratings upgrade, Moody’s Investor Service said.
Last week, Moody’s revised the outlook on South Africa’s foreign currency debt ratings to positive from stable but left the outlook for A2-rated domestic currency debt at stable.
It rates South Africa’s foreign currency debt and the country ceiling for foreign currency bank deposits at ”Baa1”. The improved outlook has raised hopes of an upgrade in its rating within the next 12 to 18 months.
Moody’s senior credit officer Kristin Lindow said on Thursday all of South Africa’s external indicators had strengthened considerably since its last upgrade in 2005, while public finances had also improved.
South Africa’s Treasury says tight control of government finances and efficient tax collection produced its first budget surplus, of 0,6% of gross domestic product for the 2006/07 financial year.
But Lindow, South Africa’s sovereign ratings analyst, said Africa’s economic powerhouse had socio-economic problems which meant its A2 domestic currency rating was still appropriate.
”As you move up in the A ranges, say to A1, that is suggesting you are moving into double AA, and we don’t think that with South Africa’s current income levels that would be appropriate,” Lindow told Reuters on the sidelines of Moody’s South African Credit Risk conference.
She said income levels were still too low compared to its peers in the A2 ratings grade, like economies in Eastern Europe, and the country faced other problems such as HIV/Aids and capacity constraints due to low skills and high unemployment.
”South Africa fits very well in that [lower] A category still, in spite of the fact that public finances have continued to improve perhaps even faster than we expected,” Lindow said.
Rates to rise
Despite a strong economy, South Africa still has huge income disparities left by the apartheid era and the government says at least 25,5% of the population is unemployed, although independent analysts say the figure is far higher.
An estimated 12% of the 47-million population is infected with the HI virus and about 1 000 die of HIV/Aids-related conditions every day.
Lindow said although South Africa’s current account deficit widened to 7,8% of GDP in the fourth quarter of 2006, the government was well placed to deal with any changes in its external circumstances.
The economy was also expected to sustain growth rates of between 4.5% and 5% of GDP, despite higher interest rates.
Rates were likely to rise by 50 basis points in August, following an increase last week, as the central bank tackles on rising inflation, which breached the 3% to 6% band in April.
”Monetary policy is still in a tightening mode with another hike anticipated in August,” she said.
While growth was solid, Moody’s would be looking for evidence that the economy could sustain expansion of more than 5% of GDP a year.
Lindow said Moody’s was also waiting to see how the governing ANC party handled the election of a new party leader.
”We are pretty comfortable with it but it is important to see that transition happen in a relatively smooth fashion,” she said, adding a change in economic policy towards a more populist stance with high spending could negatively impact the rating.
The African National Congress (ANC) is to choose its president in December and the winner is a shoo-in to succeed Thabo Mbeki when his second term ends in 2009, given the ANC’s overwhelming electoral support. – Reuters