Pretoria - South Africa is weathering the global recession quite well compared to other countries and political risk has eased since April's smooth transfer of power to the new administration, says global rating agency Fitch.
"South Africa is weathering the global recession and credit crunch quite well compared to its rating peers," said Veronica Kalema, Director of Fitch's Sovereign group, in a statement.
"Although GDP will fall by 1 to 2 percent this year, this will be far less than most 'BBB' category sovereigns.
"Political risk has also eased since April's smooth transfer of power to President Jacob Zuma," said Ms Kalema.
On Monday, Fitch Ratings, which provides the world's credit markets with independent and prospective credit opinions, research, and data, affirmed all of South Africa's sovereign ratings. The country's Long-term foreign currency Issuer Default Rating (IDR) is 'BBB+' and the Long-term local currency IDR is 'A'.
The Outlooks on the Long-term foreign and local currency IDRs remain negative, while Fitch has affirmed the Country Ceiling at 'A'.
Country Ceilings reflect Fitch's judgment regarding the risk of capital and exchange controls being imposed by the sovereign authorities that would prevent or materially impede the private sector's ability to convert local currency into foreign currency and transfer to non-resident creditors.
An 'A' rating denotes expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
According to Fitch, the post-election political landscape and its implications for policy is still unfolding, at a time when the budget deficit is rising sharply and the current account deficit, while diminished, remains large and presents continuing financing challenges.
South Africa's ratings, Ms Kalema said, have been on Negative Outlook since November 2008 when Fitch took negative rating action on a number of major emerging markets in the face of the sudden and fast deterioration of the global economic environment in the second half of last year.
"South Africa has been affected mainly through trade and capital flows channels; there were large portfolio outflows and a sharp weakening of the currency.
"Though portfolio flows have since returned and the Rand has recovered most of the ground lost since March 2009, the combined impact of global recession and a domestic cyclical downturn will be more broadly felt in 2009," said Fitch.
Fitch's earlier forecast of recession has been confirmed, but the agency now forecasts that GDP will contract by 1 to 2 percent in 2009.
"Revenue shortfalls mean the budget deficit could approach 6 percent of GDP in the current fiscal year (Financial Year (FY) 09: April 2009-March 2010) and remain high, albeit declining, in the subsequent two years," said Fitch.
Fitch therefore expects the government debt ratio to rise from a low of 27 percent in FY08 to around one-third by FY10. External debt ratios are also forecast to rise as borrowing is stepped up to finance public sector investment and the current account deficit (CAD).
Several years of prudent fiscal policy gave South Africa fiscal space to weather a temporary increase in the budget deficit without the debt ratio exceeding 'BBB' category medians.
However, the increase in debt of the broader public sector, which includes non-financial public enterprises, will be much starker, as infrastructure spending is stepped up.
In the longer-term, this investment will help the country ease some of the structural constraints to a higher growth potential, which will be key to improvement in the sovereign rating.
Falling inflation and slower private credit growth in response to earlier monetary tightening is also allowing a monetary stimulus, said Fitch, adding that interest rates have been reduced by 450 basis points since December which will help support growth into 2010.
In addition, due to tighter regulation and supervision, the South African banking sector has been relatively insulated from the global credit crunch and although banking sector asset quality and profitability are worsening in the economic downturn, the sector is better placed than most "BBB" country banking sectors to support the recovery, said Fitch.
Some of the imbalances in the economy are starting to ease, with credit growth slowing sharply and domestic inflationary pressures abating.
The CAD is also forecast by Fitch to narrow, though to a still relatively high 5 to 6 percent of GDP.
As this will not be fully covered by increased public sector borrowing and foreign direct investment, financing will still rely on portfolio flows, presenting a persistent risk to macroeconomic stability given continued volatile global risk appetite.
High wage pressures also present a challenge to public finances, inflation and competitiveness.
"A smooth political transition after the fourth post-apartheid general election, the most vigorously contested so far, has reduced short-term political uncertainty, strengthened democracy and should ease investor concerns as the country navigates the downturn," said Fitch.
However, political risk has not diminished completely. Expectations have been raised and sporadic riots are a reminder that service delivery, which is a priority for the new government, has the potential to threaten political stability unless effectively addressed.
South Africa's ratings could come under further downward pressure if economic recovery is weaker and more protracted than Fitch currently expects, leading to a worsening of key credit indicators. A weakening of the policy environment would also be ratings negative.
However, if the country navigates the downturn over the next 12 to 18 months without a sharp deterioration of its credit metrics and with macroeconomic stability intact, the Outlook would be revised to Stable.
