S&P affirms SA ratings, outlook stable

Cape Town - Standard & Poor's Ratings Services on Friday affirmed its long- and short-term foreign currency sovereign credit ratings on South Africa at 'BBB-/A-3'.

"We also affirmed the 'BBB+/A-2' local currency ratings and the 'zaAAA/zaA-1' South Africa national scale ratings. The outlook remains stable," S&P said in a statement.

After expected poor GDP growth in South Africa in 2014, S&P said it forecasts a slight improvement in 2015-2017. It also expects the Treasury to keep to its "hard expenditure ceiling" and thereby contain fiscal deficits and general government debt levels in the medium term.

"Nevertheless, GDP growth remains low, current account deficits remain relatively high, general government debt sizable, and portfolio flows potentially volatile."

S&P said its ratings are supported by its view that President Jacob Zuma's second term will continue to ensure political and institutional stability; broad policy continuity; that South Africa will maintain fairly strong and transparent institutions; and deep financial markets.

S&P said while it thinks Zuma's second administration will continue the policies of his first administration, which controlled fiscal expenditure and fostered broadly stable prices, it has so far not undertaken labour or other economic reforms aimed at significantly boosting GDP growth.

However, at the same time, it also doesn't believe that the ANC-led government will entertain radical policies, such as the nationalisation of mines, the ratings agency said.

S&P expects full-year GDP (by expenditure) growth of 1.4% in 2014, rising to 2.5% in 2015 and 2.9% in 2016 and 2017, based on fewer and shorter strikes, and increases in electricity supply and consumer demand.

This follows relatively slow growth of 1.9% in 2013 and 2.5% in 2012, and continues to highlight prolonged subdued growth for a country with per capita GDP of about US$6 500 (R75 800).

The improvement in growth in 2015-2017 will also depend on wage negotiations in the gold, and other sectors and the electricity supply situation - continued shortages of electricity could jeopardize any possible recovery, it said.

"Although we expect the South African Treasury to abide by its hard expenditure ceiling, as highlighted in its October 2014 Medium Term Budget Policy Statement (MTBPS), slower-than-forecast growth and other factors may place overall fiscal targets beyond reach.

"The fiscal stance over the next few years may become exposed to lower-than-expected economic growth, pressures from a forthcoming round of public-sector wage negotiations, and increased public spending needs," S&P said.

On general government debt, it said net of liquid assets, it increased to 39% of GDP in 2013, from 22% in 2008, and it expects it to reach 44% by 2017. "Although little of the government's debt stock is denominated in foreign currency, non-residents hold about 37% of the government's rand-denominated debt, which could make financing vulnerable to investor sentiment."

S&P said its ratings are also constrained by sizable current account deficits. "Although the rand floats and is an actively traded currency (according to the BIS triennial survey of foreign exchange dealing, it is traded in 1.1% of global foreign-exchange contracts), the portfolio and other investment flows that finance these deficits can be volatile.

"Outflows could result from global changes in risk appetite or from foreign investors reappraising prospective returns in the event of growth or policy slippage in South Africa, or rising interest rates in advanced markets.

"While capital inflows have largely resumed since February 2014 - after a period of withdrawal - another reappraisal of risk is possible. Slow growth and strikes may heighten both fiscal and external pressures," the ratings agency said.

S&P said the stable outlook reflects its view that a slight improvement in GDP growth in 2015-2017 will help contain South Africa's fiscal and external balances within our expectations.

It however warned that it could lower the ratings if external imbalances increase, or funding for South Africa's current account or fiscal deficits becomes less readily available. It could also lower the ratings if South Africa's business and investment climate weakens, for instance if labour disputes escalate again or GDP growth weakens significantly; if large electricity shortages persist; or if political tensions increase.

On the outlook for the local currency ratings, S&P said it could lower it potentially by more than one notch if the government's fiscal policy flexibility decreases, particularly if public sector wages or debt-service costs increase more than it currently expects.

On the upside S&P said it could revise the outlook to positive if an improvement in investment and economic growth prospects produces better government debt dynamics than it currently expects.


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