South African public finances are sound and the financial system is healthy, while strong economic growth will continue, albeit as a slower pace, Moody’s Investor Service said on Thursday.
But political and socio-economic risks may dampen investor sentiment and cloud prospects for a ratings upgrade.
”South Africa’s foreign exchange reserves have strengthened markedly since our last upgrade in 2005, which helps provide momentum for the foreign currency ratings,” Moody’s vice-president Kristin Lindow said in an annual country report.
”In addition, the current economic upswing, already in its eighth year, might be extended for another few years, though at a slower pace in the near term.”
Africa’s biggest economy expanded by 5% last year, just off 2005’s two-decade record of 5,1%, but short of government targets considered sufficient to slash unemployment of around 25%.
Growth is widely expected to ease over the next two years, pinched by higher interest rates aimed at taming inflation.
Moody’s said the rate hikes — which have lifted the repo rate 350 basis points to 10,5% since June last year — and a new credit law should ease growth amid signs the economy was overheating.
It forecast expansion of 4,7% this year, slowing to 4% in 2008.
Moody’s said monetary tightening should be near a peak although there was a risk of a wage-price spiral if inflation expectations are not brought under control.
Aids, crime a threat
Official data on Wednesday showed targeted CPIX inflation jumped to a four-year-high of 6,7% year-on-year in September, further above the central bank’s 3% to 6% band.
Moody’s said a marked improvement in South Africa’s external credit-worthiness suggested a two-notch gap between its foreign and domestic currency ratings could be reduced by raising the foreign currency rating.
The agency lifted the outlook on the ”Baa1” foreign currency rating to positive in June, while leaving unchanged the stable ”A2” domestic currency rating.
However, high unemployment, an HIV/Aids pandemic, wide income disparities and rampant crime may contain ratings.
”Left unaddressed, these problems would pose concerns for longer-term economic and political stability,” Lindow said.
Presidential succession was also an source of uncertainty.
President Thabo Mbeki’s desire to stand for a third term as head of the African National Congress at a December congress — even though he cannot serve as the country’s president after 2009 — had complicated matters.
Mbeki’s bid could be seen as a way to stay deeply involved in decision-making and to thwart a campaign by opponent Jacob Zuma, Moody’s said.
It added that South Africa had a well-balanced external debt profile and growing reserves that helped to mitigate concerns over a large current account deficit.
”In Moody’s opinion, South Africa’s free-floating exchange rate combined with the relatively low external debt burden suggests that the financial consequences of an outflow or reduction or foreign capital to finance the current account deficit, would be mild.”
Moody’s predicted the current account deficit relatively steady at 6,8% of GDP for 2008, and the rand at 6,90 to the dollar at the end of 2007 and seven to the greenback at the end of 2008. – Reuters