[snap] Fitch downgrades South Africa

Rating agency Fitch has downgraded South Africa to BBB from BBB+, staying one notch above investment grade. The country is on a stable outlook, meaning that no further downgrades are imminent.

Fitch joins S&P, which downgraded the country?s debt in October, also to BBB, and Moody?s which in September downgraded the country from A3 to Baa1.

In its statement, Fitch noted that:

- Economic growth performance and prospects have deteriorated, affecting the public finances and exacerbating social and political tensions. In the five years to 2012, GDP growth averaged 2.2% in South Africa (1.3% in per capita terms), compared with 4.7% for emerging markets as a whole.

- Public finances have weakened. Fitch estimates national government debt will have risen to 41% of GDP (around 43% including local authorities) at end-2012 from 27% at end-2008 and now slightly above the ?BBB? range median. In its 2012 Medium-Term Budget Policy Statement (MTBPS), the government announced slippage in its budget deficit consolidation plans out to 2014/15, which will result in a higher peak in the government debt ratio.

- A trend decline in competitiveness, reflecting wage settlements above productivity and infrastructure constraints, contributed to a widening in the current account deficit to 6.5% of GDP in 2012 (Fitch estimate) from 3.4% of GDP in 2011. The country?s net external debt position has also been trending up since 2006.

- Social and political tensions have increased as subdued growth, coupled with rising corruption and worsening government effectiveness, have constrained the government?s ability to improve living standards, reduce the 25.5% unemployment rate and redress historical inequalities as rapidly as the population demands. Protests over poor service delivery increased to record levels in 2012 and the economy has been beset by violent strikes that have affected growth and the current account.

But on the bright side?

Nevertheless, South Africa?s investment grade rating is underpinned by a generally sound banking system, a deep local bond market that allows the sovereign to borrow in its own currency (91% of the total) at long maturities (average 9.2 years, including T-bills) and a floating exchange rate and inflation-targeting regime that is an effective shock absorber. Furthermore, South Africa outscores the ?BBB? range median on all six of the World Bank?s governance indicators as well as its measure of the business climate, and its income level is well above that of countries in the ?BB? range.

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Source: http://blogs.ft.com/beyond-brics/2013/01/10/snap-fitch-downgrades-south-africa/

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