Mariam Isa
11 November 2008
Johannesburg — SA's treasury has dismissed a warning from Fitch Ratings Agency that a global downturn may force the economy into a recession and prompt the government to abandon policies which have backed its investment-grade credit rating.
As part of a review of 17 top emerging markets yesterday, Fitch revised its outlook for SA's BBB+ sovereign credit rating to negative from stable, which means it could be downgraded in the next 18-24 months.
The other two top rating agencies -- Moody's Investors Service and Standard & Poor's - have kept a stable outlook on their ratings for SA, which are also at the top of the "lower investment grade" category.
Fitch said that capital outflows from emerging markets in general would make it harder to finance the ballooning deficit on SA's current account.
That would raise the risk of a "hard landing" for the economy or even tip it into a recession, along with its main trade partners, Europe and the US.
Treasury director-general Lesetja Kganyago said he did not agree with the Fitch assessment, which downgraded four other emerging markets yesterday, cutting Romania's credit rating to "junk" status. It also revised outlooks for Russia, Korea and Mexico to negative from stable.
"They are on shaky ground; I don't think their statement on SA is well grounded," Kganyago said in a telephone interview from Sao Paulo. "We don't see a risk of a downgrade, and we think that over the next few months we will be vindicated."
Fitch highlighted concern about SA's political transition after elections next year, saying that "in the event of a recession the political commitment to the current economic policy framework could be tested".
But Kganyago said he was confident the new African National Congress (ANC) leaders would keep their pledges to stick to the prudent economic policies that have won SA credibility in global markets in the past 14 years.
"We don't see any risk of a reversal of prudent economic policies. There is an appreciation of this from policy makers. The consequences are (otherwise) too ghastly to contemplate ... there is no room for policy errors now," he said. President Kgalema Motlanthe and ANC leader Jacob Zuma have gone out of their way to reassure markets that SA's economic policy cornerstones will stay in place.
These include inflation targeting, a floating exchange rate, central bank independence and pragmatic fiscal policies, which have been criticised by the South African Communist Party and the Congress of South African Trade Unions.
Brian Coulton, Fitch's head of sovereign ratings for emerging markets, said it was worrying that SA had gone into the global crisis with "large imbalances" in its economy, namely its current account deficit.
"We are slightly concerned that given the political transition ... SA's policy framework could come under pressure.
"Were that to happen, that would be negative for its credit-worthiness," he said.
But Coulton emphasised that Fitch was not putting SA on "negative credit watch", which would mean pressure for a downgrade was immediate.
SA's current account deficit is seen as the most vulnerable spot in its economy, swelling to 7,3% of gross domestic product last year -- a 36-year record -- from a modest surplus in 2002.
So far the shortfall has been financed comfortably by capital inflows generated by foreign investment. But this year, those flows have reversed, hit by a bout of global risk aversion triggered by the credit squeeze.
In the year so far, foreigners sold a net R52,8bn in local shares after buying a net R79,2bn in the corresponding period last year. So far this year they have sold a net R12,4bn in bonds.
But Kganyago said SA had not yet had problems financing its current account deficit. A decision last week by UK mobile operator Vodafone to buy another 15% stake in Telkom was both a capital inflow and a sign of confidence in the economy, despite global turbulence.
If SA did run into problems it would access a credit facility set up last month by the International Monetary Fund to help emerging economies with a strong track record deal with the crisis. "We know that such a facility is available," he said.
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