LONDON, December 18 (Fitch) Fitch Ratings has affirmed the Republic of South Africa's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' and 'BBB+', respectively. The issue ratings on its senior unsecured foreign and local currency bonds have also been affirmed at 'BBB' and 'BBB+', respectively. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling has been affirmed at 'A-' and the Short-term foreign currency IDR at 'F3'. Fitch has also affirmed the common Country Ceiling of the Common Monetary Area of South Africa, Lesotho (BB-), Namibia (BBB-) and Swaziland (not rated) at 'A-', in line with South Africa's Country Ceiling. KEY RATING DRIVERS The floating exchange rate and inflation-targeting framework act as an effective shock absorber for the economy. Foreign currency-denominated debt and dollarisation rates are low. Governance and the business climate are better than the 'BBB' median according to World Bank indicators. South Africa has a strong banking system, with a capital adequacy ratio of 14.9% and a Fitch Viability Rating of 'bbb', which measures the system's intrinsic strength. Deep local capital markets support financing flexibility. Government debt is largely local currency-denominated (92%) and has a high average maturity of 9.8 years (including T-bills), limiting exchange rate and financing risk. The sovereign has cash deposits equivalent to 5.5% of GDP. Economic growth has been weak, adversely affecting living standards and public finances, and fuelling social and political tensions. Real GDP growth averaged a lacklustre 1.9% (0.8% in per capita terms) in the five years to 2013, compared with the 'BBB' median of 2.5%. Fitch forecasts growth to recover modestly from 1.8% in 2013 to 2.8% in 2014 and 3.5% in 2015, which is around estimates of trend growth, helped by a pick-up in global growth and an easing in supply constraints.
The current account deficit (CAD) is expected to widen from 5.2% in 2012 to 6% of GDP in 2013 and stay above 5% in 2014 and 2015. In the first three quarters of 2013, it was more than financed by the capital and financial account plus errors and omissions (E&O). E&O were equivalent to 3.6% of GDP, suggesting the CAD may be over-recorded. Nevertheless, it leaves the country vulnerable to shifts in global liquidity, for example related to Fed tapering of its asset purchases. It also means that net external debt is rising, to 13% of GDP at end-2013, above the 'BBB' range median of 6%. South Africa also has a significant budget deficit, which is estimated by the government at 4.2% of GDP in fiscal year 2013/14. Despite tough expenditure ceilings, it is not projected to reach 3% until FY2016/17, compared with the 'BBB' median of 2.5%. General government debt has climbed to an estimated 46% of GDP in 2013 from 27% in 2008, above the BBB' median of 40.5%, reducing the space to absorb further adverse shocks. Fitch projects it to peak at around 48% in 2015. South Africa faces a number of structural weaknesses. GDP per capita is below the 'BBB' median and inequality is high, partly reflecting the legacy of apartheid. Unemployment is elevated at 25% and the labour market is subject to disruptive strikes. According to World Bank indicators, government effectiveness and corruption have worsened over the past five years. Frustration with living standards and poor service delivery has continued to fuel a wave of social protests. Prospects for the mining sector appear less gloomy this year, helped by the 20% depreciation of the rand against the USD year to date, restructuring and improved labour and government relations. Progress on implementing the National Development Plan (NDP) seems mixed. Some constituents within the government and ANC appear unenthusiastic about some elements of the NDP. Nonetheless, there has been some progress on a few reforms such as integrating the NDP into budget expenditure allocations, the youth wage tax incentive scheme, the creation of a chief procurement office and unpopular road e-tolling in Gauteng. The Medium-Term Strategic Framework, with near-term priorities and action plans, due after the election in April, as well as the make-up of the cabinet will provide further evidence on implementation intent and capacity. RATING SENSITIVITIES The main factors that individually or collectively could trigger a negative rating action include: - Failure to generate faster GDP growth. - Material slippage against government fiscal projections. - Failure to narrow the CAD. - A significant increase in social unrest or policy measures that damage the investment climate. The main factors that individually or collectively could trigger a positive rating action include: - An improvement in medium-term growth prospects, for example bolstered by the successful implementation of structural reforms in the NDP. - A significant and sustained reduction in the budget and current account deficits. KEY ASSUMPTIONS Fitch assumes that the South African Reserve Bank is committed to maintaining inflation within its 3%-6% inflation target and would act as required to fulfil its mandate. The agency's fiscal projections are based on the assumption that the government will broadly stick to its budget deficit plans set out in the October 2013 Medium-Term Budget Policy Statement. Fitch assumes there is no severe and sustained fall in South Africa's terms of trade, for example related to falls in commodity prices. Fitch's current assumption for South Africa's medium-term growth potential is around 3.5%, based on some pick up in global growth.
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