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Fillip for SA as Fitch revises rating

Johannesburg - Ratings agency Fitch revised South Africa's outlook to stable from negative, saying the country had emerged from recession with its credit fundamentals roughly in line with or slightly better than peers.

Fitch said it expected real gross domestic product (GDP) growth to have recovered to 2.8% in 2010 after a contraction the previous year, and that the improvement, slightly faster than originally projected by the government, had aided fiscal consolidation.

"South Africa's post-global crisis adjustment process has been smoother than originally thought and the economy is emerging from the global recession with its credit fundamentals roughly in line with or slightly better than rated peers'," said Veronica Kalema, Director in Fitch's Sovereign group.

The National Treasury welcomed the revision, “particularly in the current economic climate with rising fiscal risks elsewhere.”

“The revised outlook reflects confidence in our credit position and future policy direction, thanks in large part to a record of prudent execution of macroeconomic policies.  The government’s efforts to steer the economy to a new trajectory is another factor that will further boost confidence in the country’s policies,” it said.

After falling 1.7% in 2009, Fitch expects real GDP growth to have recovered to 2.8% in 2010. Medium-term budget deficits and debt ratios have been revised downwards.

Spending by state entities Eskom and Transnet will continue to provide a stimulus to the economy, it said.

The ability of local capital markets to finance wider deficits with relative ease emphasises a key rating strength of South Africa.

The public debt ratio is projected to stabilise at 41% of GDP in 2012/13, in line with the median for the 'BBB' category.

Due to lower-than-requested tariff increases for Eskom, the government increased the power utility's guarantee to R350bn (13.4% of 2010 GDP) from R176bn.

Fitch estimates the public sector debt to reach just below 60% of GDP in 2013/14 as the guarantee is drawn down. The facility is chiefly to enable Eskom to borrow at reduced cost to complete two major power stations.

The risk of the government being called to pay out on Eskom's guarantee facility is, in Fitch's opinion, fairly low.

Monetary policy is supporting the economic recovery and imbalances in the economy continue to improve, said Fitch.

Credit growth was just 4.6% and inflation 3.6% in November 2010.

The current account deficit narrowed to around 4% of GDP in 2009 and is expected by Fitch to remain around this level for 2010. The deficit has been more than covered by strong portfolio inflows, it said.

Structural issues in the areas of energy and transport infrastructure and labour markets continue to weigh on the ratings and, if not successfully addressed, will be become more negative for the ratings over time, it said.
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