Global recession, govt policy risks SA rating outlook

The two main risks to South Africa’s rating outlook are the global recession and uncertainty about government policy after the elections, Fitch ratings said on Wednesday.

“A material change of policy due to political and social pressures from a sharply slowing economy and a more competitive political environment would lead to negative rating action,” the agency said in a
statement.

A leadership transition within the African National Congress, followed by a split and emergence of a viable opposition party ahead of this year’s elections, had also increased political uncertainty, and effected investor sentiment, Fitch said.

“Over the past year, Fitch has twice changed the outlook on South Africa’s rating, from positive through to negative, in response to the fast deterioration in the global economy in the second half of 2008, coming on top of earlier measures to cool demand,” Fitch said.

The country’s current account deficit was expected to narrow only slightly this year, making it particularly vulnerable to adverse changes in investor sentiment.

“The outlook continues to reflect negative global economic developments since that time on growth, public finances and financing of the current account deficit.” said Fitch Rating’s Veronica Kalema.

However, there were some mitigating effects, such as falling inflation which was making room for aggressive interest rate cuts, and sound public finances which were allowing for a counter-cyclical fiscal stimulus.

The agency noted that inflation targeting and a flexible exchange rate framework was an important institutional strength.

“The SA Reserve Bank has not intervened to support the currency despite the sharp drop in the value of the rand, which is supporting South Africa’s adjustment to the global economic slowdown.

“And although banking sector asset quality and earnings are worsening, the banking system has not needed special government support, remains relatively sound and is better placed than most
systems to support an economic recovery.”

Fitch expected South Africa’s gross domestic product to grow by less than 1% this year.

A more severe and protracted global recession and/or an adjustment of domestic demand would delay and mute South Africa’s recovery, worsen
key indicators of creditworthiness and lead to further downward pressure on the ratings, the agency said.

“Should South Africa manage the fallout from the global recession and financial crisis over the next two years—given robust economic institutions and other strengths, such as the financing flexibility
provided by the domestic debt market, still relatively moderate public debt and external liabilities and a relatively sound banking system—the rating outlook could be revised back to stable,” Fitch said. - Sapa

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