Politics may hurt SA's ratings

Johannesburg - The two main risks to South Africa's rating outlook relate to the extent of the global recession and the government's policy commitment in the face of a deteriorating domestic economy and the emergence of a new credible opposition party, according to rating agency Fitch on Tuesday.

Fitch expects South Africa's GDP to grow by less than 1% this year. A more severe and protracted global recession and/or 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.

Elections are to be held on April 22 and the ruling African National Congress (ANC) is expected to win with a reduced majority due to the emergence of a viable opposition party.

"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," says Fitch.

However, it adds that 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.

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.

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

"A leadership transition within the ruling ANC, followed by a split and emergence of a viable opposition party ahead of this year's elections, have also increased political uncertainty, and impacted investor sentiment," says Fitch in a new report on SA.

"The outlook continues to reflect negative global economic developments since that time on growth, public finances and financing of the current account deficit," says Veronica Kalema, director in the Sovereign Group.

Some mitigation is being provided by falling inflation which is making room for aggressive interest rate cuts, and sound public finances which are allowing for a counter-cyclical fiscal stimulus.

Fitch estimates that South Africa's public debt will rise to 31% of GDP in the financial year 2010/11 (April to March) from a low of 27% in 2008/09, which would still be lower than the "BBB" median projection of 37% in 2010.

The agency notes that inflation targeting and a flexible exchange rate framework is an important institutional strength. The South Africa 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.

- I-Net Bridge,