Nicolette Dirk, finance writer, justmoney.co.za
Fitch Ratings announced yesterday (Wednesday 18 December) that it has affirmed the country’s long term foreign and local currency Issuer Default Ratings (IDRs) at ‘BBB’ and ‘BBB+’ respectively.
Among positive factors influencing Fitch’s ratings affirmation were a strong banking system and deep local capital markets. The ratings agency said that government debt was largely allocated in local currency and has a high average maturity.
This limited exchange rate and financing risks. Fitch added that the floating exchange rate and inflation-targeting framework also act as an effective shock absorber for the economy.
The country’s economic anchor
The rating agency did however indicate that weak economic growth and a widening current account deficit were downside drivers preventing the economy from achieving a more positive rating.
“Economic growth has been weak, adversely affecting living standards and public finances, and fuelling social and political tensions. Real GDP growth averaged a lacklustre 1.9% (0.8% in per capita terms) in the five years to 2013, compared with the 'BBB' median of 2.5%,”it said.
Fitch also forecasted growth to recover modestly from 1.8% in 2013 to 2.8% in 2014 and 3.5% in 2015, which is around estimates of trend growth, helped by a pick-up in global growth and an easing in supply constraints.
“South Africa faces a number of structural weaknesses. GDP per capita is below the 'BBB' median and inequality is high, partly reflecting the legacy of apartheid. Unemployment is elevated at 25% and the labour market is subject to disruptive strikes,” said Fitch.
Fitch added that according to World Bank indicators, government effectiveness and corruption have worsened over the past five years.
Frustration with living standards and poor service delivery has continued to fuel a wave of social protests.
“Prospects for the mining sector appear less gloomy this year, helped by the 20% depreciation of the rand against the USD year to date, restructuring and improved labour and government relations,” it said.
In a statement the National Treasury said they considered Fitch's decision fair in view of the global economic climate and the South African government's commitment to its counter cyclical fiscal policy stance.
“As set out in the 2013 Medium Term Budget Policy Statement, government’s fiscal framework is aimed at reprioritizing expenditure and revenue, while providing support to the economy and strengthening infrastructure investment for sustainable long-term growth across all critical sectors of the economy.
The South African government is committed to consistently making efforts to address the concerns identified in Fitch’s rating review which is aimed at improving investor confidence,” said National Treasury.