INTERNATIONAL. On March 28, 2012, Standard & Poor's Ratings Services revised its outlook on the Republic of South Africa to negative from stable.
At the same time, we affirmed the long- and short-term foreign currency ratings on South Africa at 'BBB+/A-2' and the long-and short-term local currency ratings at 'A/A-1'.
We also affirmed the long- and short-term South Africa national scale ratings at 'zaAAA/zaA-1'.
The transfer and convertibility assessment is unchanged at 'A'.
The negative outlook reflects the potential for a downgrade if economic and social problems feed into the political debate in the run-up to the 2014 national and provincial elections and consequently further put pressure on the policy framework.
We consider that South Africa's near-term political pressures have diminished since the African National Congress (ANC) has put the leadership of its youth league, which advocated nationalization of the country's mining sector, through a disciplinary process. We also think that South Africa's Treasury remains committed to further gradual fiscal consolidation, stabilizing its debt levels that have grown strongly since 2009.
However, fundamental structural economic and social problems, such as low per capita growth estimated at 2.1% in 2012 and very high unemployment rates, persist, and South Africa's structural current account deficit makes the economy dependent on external financing.
Draft policy documents expected to be discussed ahead of the ANC national conference in December 2012 support our expectation that there will be no abrupt shift in the party's policies, despite continued debates ahead of the conference. This is because of the party's checks and balances, the allocation of key positions to the centrist wing, and the economy's exposure to market sanctions.
Nevertheless, we think that looming economic and social pressures could gradually affect the country's policy framework. In the run-up to the 2014 elections, the ANC's centrist wing may make gradual concessions to the more populist expectations from within and without the party.
Deterioration in the global economic environment could add pressure given that exports of goods and services amount to about 30% of GDP and that the country runs persistent current account deficits, which we estimate will be about 4% of GDP in 2012.
We expect that nearly one-half of the current account deficit will be funded by net foreign direct investment, and the other half through an increase in external debt, as was the case in 2011. This is because portfolio equity continues to be a net outflow.
Standard & Poor's ratings on South Africa are supported by our view of the country's stable political environment and transparent institutions. Its moderate fiscal and external debt afford South Africa fiscal and monetary flexibility, as seen in the country's successful use of macroeconomic policies to cushion the burden of the recent global economic downturn.
The ratings are constrained by South Africa's multiple development needs and social challenges, which we think may have long-term ramifications for policy and may raise fiscal expenditure pressures. Supply shortages--including infrastructure bottlenecks and labor market rigidity and skill shortages--constrain South Africa's growth potential.
We consider South Africa to be a middle-income country with a diverse economy but wide income disparities. We estimate per capita GDP at $7,800 for 2012.
In our view, South Africa's gradual fiscal consolidation, which targets a general government deficit of 3% of GDP by 2014, is vulnerable to public sector wage increases and multiple development needs and social challenges. We anticipate the 2011 fiscal year ending March 31, 2012, will close with a general government deficit of 4.8% of GDP, which is better than budgeted. The improvement stems in part from underspending on capital projects.
General government debt has approximately doubled since 2008, and the debt burden has risen by a little more than 10% of GDP. We expect gross general government debt to stabilize at just under 43% of GDP over the next three years.
We estimate gross public sector debt (including nonfinancial public enterprises) to increase to 52% of GDP at the end of fiscal 2011, and to further increase to 58% of GDP by 2014, a significant increase compared with 35% in 2008. This is because of increased borrowing by South African power utility ESKOM and other entities involved in addressing infrastructure gaps.
We estimate the country's net external liability position will widen to 73% of current account receipts this year, but the prevalence of equity funding has kept net external debt (excluding liquid assets) low at an estimated 12% of current account receipts this year. We expect infrastructure investment to result in a rising external debt burden in the next few years, but we also expect the country's export capacity to improve.
The outlook is negative because we could potentially lower the ratings if economic and social problems feed into the political debate in the run-up to the 2014 elections and consequently further put pressure on the policy
framework. The difficulty of addressing economic and social imbalances could be exacerbated by increasing external pressure in a context of sluggish global growth or investor risk aversion.
We could lower the ratings if South Africa's economic disparities and social development needs persist, with the economy increasingly failing to generate the jobs required by an expanding labor force. Rising external or fiscal pressures could also lead to a downgrade, particularly if public sector wages or debt service costs increase above expectations.
We could affirm the ratings at the current levels and revise the outlook to stable if the increase in public sector debt is offset by an improvement in investment and economic growth prospects, and if fiscal consolidation is
supported by keeping public sector wage increases gradual and moderate.
About Standard & Poor's Ratings Services
Standard & Poor's Ratings Services, part of The McGraw-Hill Companies (NYSE:MHP), is the world's leading provider of independent credit risk research and benchmarks. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 23 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight.
Our research and opinions about relative credit risk provide market participants with information and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.