Capital Intelligence (CI), the international emerging markets rating agency, announced on Monday that it had raised South Africa’s long-term foreign currency rating to BBB+ from BBB- and increased its short-term foreign currency rating to A2 from A3.
CI has also assigned long- and short-term local currency ratings of A- and A2, respectively. The outlook is stable.
The upgrade reflects the strengthening of South Africa’s international liquidity position over the past two years, which has enhanced the economy’s ability to weather external shocks, a developing track record of prudent fiscal and monetary policy, and favourable prospects for faster and more durable economic growth over the medium term.
South Africa is currently enjoying a period of above-trend output growth supported by a generally favourable global economic environment, high commodity prices, and strong domestic and international confidence.
Real GDP expanded by 4.5% in 2004 and by an estimated 5% in 2005 compared to an annual average of 3% over the past decade.
Favourable fiscal performance
Fiscal performance is favourable and characterised by low budget deficits, a declining interest burden and stable debt dynamics, with the ratio of central government debt to GDP staying close to 36% since March 2003.
Fiscal risks appear to be of manageable proportions and fiscal transparency is high by international standards.
Monetary policy has been strengthened over recent years and the adoption of a direct inflation targeting regime, supported by a flexible exchange rate, has helped to lower inflation expectations and enabled domestic interest rates to be reduced.
Domestic capital markets are comparatively deep and the banking sector is financially healthy and well regulated.
The country’s external liquidity position is reasonably strong. The foreign exchange reserves of the central bank doubled in 2004, to USD13.1 billion, and reached USD18.6 billion in December 2005.
Reserve coverage has increased
Official reserve coverage of short-term external debt denominated in foreign currency (on a remaining maturity basis) has increased from 57% in 2003 to an estimated 137% at end-2005.
Gross external debt is moderate at an estimated 19.6% (68% of current account receipts) in 2005.
The debt stock is largely matched by banking system external assets (including those of the central bank), with the result that South Africa’s net debt position is very low, in the region of 3% of GDP (12% of current account receipts).
Moreover, South Africa is unusual among emerging markets in being able to borrow from non-residents in local currency. About 36% of gross external debt is currently denominated in local currency, which limits to some extent the country’s exposure to exchange rate risk.
Challenges
South Africa’s ratings are principally constrained by a variety of structural and social challenges. Long-term economic growth prospects are hindered by infrastructure weaknesses, substantial social and wealth disparities, skills shortages, a rigid labour market and the HIV/Aids epidemic.
Raising economic and social outcomes will require the sustained implementation of reforms over a number of years and increased outlays on health, education and basic infrastructure.
CI notes that the government is clearly cognisant of the country’s problems and the reform process is generally moving in the right direction. But the challenges are substantial.
