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Fitch downgrades SA outlook

Jan 13 2012 17:31 Reuters

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Johannesburg - Fitch cut South Africa’s rating outlook to negative from stable on Friday, saying it had seen limited progress on several long-standing structural issues that have over time caused the country’s economic performance to fall behind its peers.

The rand fell 1.5% against the dollar after the move, while South Africa’s 5-year credit default swaps rose 10 basis points.

Fitch, which has a BBB+ rating on South Africa, said the country’s inability to create jobs, with an unemployment rate of around 25%, was putting pressure on growth and narrowing the tax base.

The ratings agency said the country’s external finances, though still better than its peers, were deteriorating and a failure to accelerate growth would weaken the country’s credit fundamentals.

Mixed reaction

Annabel Bishop, Economist at Investec said there was heighted attention to ratings globally.
“The reason why the ratings agency are being so active in looking at their ratings is because there is heightened sensitivity in credit ratings globally. It would be unjustified for South Africa to have a credit ratings downgrade.

“I don’t think anything in South Africa has changed to justify it (the Fitch move). They are picking up on noise. It is noise in South Africa and heightened sensitivity globally.The downward revision to the outlook was unexpected from Fitch. Moody’s has us on an outlook watch. If we did get a ratings downgrade from Moody’s, it would bring us in line with where Fitch and S&P ratings are set."

Razia Khan, head of Africa Research at Standard Chartered said the move was not surprising.
“In our view, the Fitch action - changing the outlook to South Africa’s rating from stable to negative, is not wholly surprising - given that it follows similar action by other ratings agencies.

“Political risk featured heavily in the decisions announced earlier - while that might have been subject to some improvement recently - ratings agencies appear to be looking at the longer term weak growth trajectory in South Africa, the economic progress that isn’t being made (especially with job creation), and assuming on that basis perhaps more political risk than might be currently justified.

“The point about the fiscal balance and sustainability is a fair one, and the authorities will have to be that much more growth-focused given the evident concern from all the ratings agencies over increased demand for social spending, and how affordable that is likely to be in the absence of faster growth.”

Kevin Lings, economist at Stanlib said SA did not require that outlook.
“I don’t think it’s justified in the sense that I would regard its fiscal position as still exceptionally well-managed. But if you were looking at broader policy issues, then yes, we do have concern about the uncertainty and lack of clear direction on key policy objectives, mainly relating to industrial development and employment.
“The ratings agencies are right to flag social issues and the policy issues that go along with them. I worry that it gets reflected in the cost of debt.”

Benoit Anne, of Societe Generale Corporate and Investment Banking said the downgrade was a surprise.
“It’s a bit of a surprise to be honest, but South Africa, which is highly integrated into financial markets, is vulnerable to capital outflows from the equity markets and the rand is quite vulnerable as well because it’s one of the high beta currencies.

“From a growth perspective, South Africa is really tied up to the global growth story as a commodity producer, but it does come as a surprise, which is perhaps why the rand is reacting quite so sharply.”

fitch  |  sa economy  |  ratings agencies  |  new growth path
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