Standard & Poor’s Ratings Services has revised its outlook on the
At the same time, the ‘A-/A-2’ local currency and ‘BBB-/A-3’ foreign currency ratings on South Africa were affirmed.
“The outlook change reflects South Africa’s continued strong fiscal performance and ongoing improvements in the country’s external position,” says Standard & Poor’s credit analyst Konrad Reuss. “In addition, the government has continued to strengthen its track record of sound economic management in a challenging external environment, and it is not expected to deviate from its course of orthodox economic policies in the foreseeable future.”
On the fiscal front, the government’s strategy of broadening the tax base and improving tax administration continues to underpin a strong revenue performance, resulting in a downward revision of the national government deficit for fiscal 2002/03, to 1.6% of GDP from 2.1%. Over the medium term, deficits are projected to stay in a narrow range around 2% of GDP, providing the government with renewed fiscal flexibility and supporting a steady reduction of the debt-to-GDP ratio, with national government debt expected to fall to about 40% of GDP in the next fiscal year.
Meanwhile, the government’s external position and liquidity are undergoing steady improvements, underpinned by a recovery in capital inflows, a broadly balanced current account, and the aggressive phasing-out of the Reserve Bank’s net open forward position. Net external debt is projected to trend down to about 15% of current account receipts, and net public sector external debt to about 20%. South Africa’s external liquidity remains comparatively modest, with official reserves currently covering just over 70% of the financing gap, but coverage is likely to improve further in the medium term, assuming robust capital inflows and a free-floating exchange rate.
On the monetary side, the Reserve Bank remains firmly committed to lowering inflation. The inflation-targeting framework remains effective, notwithstanding the setback to the disinflation process due to last year’s rand volatility.
South Africa’s economy has been reasonably successful in weathering the current global slowdown. Growth, however, is unlikely to rise much above 4% over the medium term, which would be needed to create jobs at a rate fast enough to ameliorate the country’s chronic unemployment and social problems. Factors still constraining growth include low levels of domestic savings and investment, and labour market rigidities. The rising incidence of HIV/Aids will also impose a severe burden on South Africa’s economy in the coming decade, straining its health system and financial resources.
“Cautious fiscal and monetary policies, coupled with growth-enhancing structural reforms, will bolster the ratings on South Africa over the coming years,” says Reuss. “A successful revitalisation of the privatization process would support a rating upgrade, as it would act as a catalyst for higher foreign direct investment (FDI) and support further debt reduction. Longer-term rating prospects hinge on higher growth, which will remain elusive until there is a significant improvement in the domestic rate of savings and investment and a sustained increase in the level of FDI inflows,” he adds.