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Treasury reassures after Fitch downgrade

Johannesburg - The Treasury reacted to a Fitch downgrade of the country’s outlook on Friday by saying it remains committed to the prudent execution of growth and policies that boost employment.

The National Treasury said in a statement it viewed the downgrade in the context of “the challenges that the global economy is going through and the persistent uncertainty in the global economic environment.”

Fitch said it downgraded the outlook because it had seen limited progress on several long-standing structural issues, such as chronic unemployment, that had caused Africa’s biggest economy to fall behind its peers.

While South Africa’s external finances were still in better shape than its peers they were deteriorating and a failure to accelerate growth would weaken credit fundamentals, Fitch said after cutting its outlook on the rating from stable.

The rand fell 2% against the dollar to a one-week low of R8.21/$ after the move, while South Africa’s 5-year credit default swaps rose 10 basis points.

Some analysts said they did not expect the move to lead to a downgrade of South Africa’s rating.
“I don’t think anything in South Africa has changed to justify the Fitch move. They are picking up on noise. It is noise in South Africa and heightened sensitivity globally,” said Investec economist Annabel Bishop.

Decreasing tax base

South Africa’s total debt equals about 35% of GDP, which looks low compared to countries in Europe that are battling a debt crisis, although analysts fear the decreasing tax base could increase debt levels beyond the Treasury’s forecasts.

“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.” said Benoit Anne, head of emerging markets strategy at Societe Generale in London.

“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.”

The government forecasts 3.4% growth this year, rising slightly from an estimated 3.1% expansion in 2011, but well below the 7% annual growth the government says is needed to generate enough jobs to have a meaningful impact on unemployment.

Moody’s downgraded the outlook on its A3 rating on South Africa to negative from stable in November, citing concerns about the high unemployment and fears that political pressure could further erode state finances.

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