South Africa’s positive credit rating outlook from Moody’s is under strain and dependent on the government maintaining its current economic policies, the ratings agency said on Thursday.
The company lifted its outlook for South Africa’s foreign currency rating to positive in June last year, putting it on course for an upgrade.
But since then the deficit on the current account has widened further, inflation has soared and economic growth is under pressure. Political uncertainty and violence against poor African immigrants has added to a gloomier outlook.
”The events of the past year do appear incongruous with the positive outlook,” Kristin Lindow, Moody’s senior vice-president and South Africa sovereign analyst, said at a conference.
However, any change to the outlook depended largely on whether a new leadership — President Thabo Mbeki’s final five-year term ends in 2009 — maintains current economic policy, including inflation targets and a prudent fiscal stance.
”I would like to get a bit of a sense of whether or not there will be significant changes [to economic policy],” she told Reuters in an interview. ”Those are the kinds of things that really affect our decision.”
Lindow said she would be talking to officials and possible leaders over the next week to discuss this ahead of the ratings agency’s due diligence meeting, but would not give a timeframe for any decision.
Moody’s rates South Africa’s foreign currency debt at ”BAA1” with a positive outlook, and has a domestic rating of ”A2” with a stable outlook.
No recession
The Congress of South African Trade Unions has demanded inflation targets — currently at 3% to 6% — be scrapped and that fiscal policy be loosened to help cut poverty. Zuma has said there will not be any major changes in economic policy.
”A lot of investors are expecting the worst [but] that is not altogether warranted,” Lindow said.
Fitch Ratings on Tuesday downgraded its outlook for South Africa’s foreign and local currency debt to ”stable” from ”positive”, citing constraints on economic growth due to inflation and a wide current account deficit.
The country’s targeted CPIX inflation surged to a five-and-a-half year high of 10,4% year-on-year in April, prompting the central bank to hike its key repo rate by another 50 basis points to 12% last week.
This brought increases since June 2006 to five percentage points. That tightening, combined with a chronic power crisis, is beginning to cut domestic demand.
Lindow said Moody’s was in line with other analysts in expecting growth to slow below the 5% average of the last four years. ”We are forecasting slowing growth but nowhere near a recession.”
Lindow said the current account deficit should ease slightly in the next few years on weaker demand and a softer currency boosting exports. The gap swelled to a 26-year high of 9% of gross domestic product (GDP) in the first quarter of 2008.
The rand, which has lost about 15% of its value against the dollar so far this year, would probably depreciate further over the next year or two, she said. – Reuters