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South Africa: South Africa Finance Profile

2015/01/24

Finance and Investment in South Africa

International agencies affirm South Africa's ratings

Ratings agencies Fitch and Standard & Poor's (S&P) both kept their rating of South Africa unchanged late on Friday, 12 December, despite analysts predicting they would opt for downgrades on the back of a nationwide power crunch and persistently low economic increase.

The government recognised the need to steer South Africa's economic increase trajectory on to a additional robust course, the National Treasury said in a statement in response to the ratings affirmations, released on 13 December. "Significant structural reforms are under way in major economic sectors that will boost the economy’s increase.

"The Medium Term Strategic Framework (MTSF) sets out the government’s actions over the next five years to achieve such a goal. The MTSF plans target a thriving business sector and a strong civil society. As a result, increase enhancing initiatives and programmes aimed at improving the competitiveness of the renewable energy sector and sustaining job creation are prioritised."

It said the 2014 Medium Term Budget Policy Statement echoed the National Development Plan’s schedule to increase private and public sector partnerships, required for additional robust economic increase.

The government would keep to the spending ceiling set out in the Medium Term Budget Policy Statement and was committed to reducing the budget deficit and stabilising government deficit levels in the medium term.

Before the announcements on Friday, the rand plunged to a six-year low against the dollar of R11.72 to the dollar; the JSE hit seven-week lows as markets expected the worst.

But just before midnight, Fitch said it would not downgrade South Africa; however, it kept a "negative outlook". It warned that economic increase "has been persistently weak relative to expectations", half because of electricity supply constraints at Eskom and strikes in the platinum and manufacturing sectors.

Similarly, before in the day, S&P said it would not downgrade South Africa's rating – it did so by presently this time– although it was as well concerned about electricity load shedding and low increase.

"Fitch has revised down its gross domestic product (GDP) increase estimate to 1.5% in 2014 owing to adverse effects from strikes in the platinum and manufacturing sectors, electricity supply constraints, declining terms of trade, weak confidence and subdued world increase," the agency said in its Friday statement.

"We have as well revised down forecasts for 2015 to 2.5% and 2016 to 3%. The authorities presently estimate potential increase at 2.5% to 3%, compared with 3.5% pre- world financial crisis."

S&P was less optimistic, putting expectations for GDP increase at 1.4%; but it predicted an development to 2.5% in 2015 and 2.9% in 2016, "based on fewer and shorter strikes, and increases in electricity supply and consumer request".

The agency pointed to industrial action as a major dampener on increase, particularly the drawn-out strike in the platinum sector before this year. It was, however, confident that Finance Minister Nhlanhla Nene was controlling government spending.

"The Medium-Term Budget Policy Statement in October 2014 signalled a tightening in fiscal policy despite weak increase. It recognised that much of the budget deficit is structural and the government can no longer delay consolidation until a cyclical recovery. The size of the tightening at 0.7% of GDP by 2016/17… is moderate, but should be enough to stabilise the government debt/GDP ratio," Fitch said.

It was as well confident of the country's private sector, saying: "Standards of governance and the business climate are stronger than the BBB median according to World Bank indicators. The banking system is well capitalised and has a standalone investment grade rating. Deep local capital markets enhance fiscal financing flexibility."

S&P affirmed its long- and short-term foreign currency sovereign credit ratings on South Africa at BBB-/A-3. It as well affirmed its BBB+/A-2 local currency ratings and zaAAA/zaA-1 South Africa national scale ratings.

"The outlook remains stable, reflecting our view that a slight rebound in GDP increase in 2015-2017 will help contain South Africa's fiscal and external balances within our current expectations," the agency said on 12 December.

Fitch Ratings affirmed South Africa's long-term foreign and local currency Issuer Default Ratings (IDR) at BBB and BBB+, respectively.

"The outlooks are negative," it said. The issue ratings on the senior unsecured foreign and local currency bonds were been affirmed at BBB and BBB+, respectively. The country ceiling was affirmed at A- and the short-term foreign currency IDR at F3.

South Africa’s economy improving: BankservAfrica index

There are positive signs that South Africa’s economy is picking up, the new BankservAfrica Economic Transaction Index (BETI) shows.

“The initial positive ... BETI in six months shows that the South African economy recovered in October,” BankservAfrica, an automated clearing home in Johannesburg, said in a statement, adding that despite the low 0.2% reading, it is the best number in seven months.

The monthly change which increased by 0.6% in September is a positive sign, according to BankservAfrica. The company said South Africa is still feeling “stronger and additional robust economic trends” but quarterly numbers are still negative mainly due to a very weak August.

“The actual BETI number was 121.1, which was the highest in three months, further reinforcing the recovery trend. Although this recovery is becoming entrenched, the speed is still debatable.”

However, once the next set of numbers came in it is likely that the quarter-on-quarter changes would be positive. The current electricity problems may pose a challenge.

“What is, however, still a problem is that strikes, such as the post office strike, are still impacting negatively on economic performance.

“A lot of postal cheques have probably been delayed and this is reflected in the fact that the number of cheque transactions declined by over 30% for the initial time since April, at the same time as there was as well a partial post office strike,” said BankservAfrica.

Adding, BankservAfrica said the average decline of 26.2% over the last 12 months is as well very high, half due to the post office strike.

The standardised BETI indicated that nominal transactions reached R675-billion for the month, an indication that South Africa’s economy is recovering.

“With both September and October breaking the downward trend, it should be safe to assume that the South African economy is showing some bounce-back. Hopefully the current power constraints do not again change the recovery trend.”

But the new BETI still shows that the South African economy“is not completely out of the woods”. “We presently expect increase closer to the two % to 2.5% range in the fourth quarter for South Africa.

“However, one must as well take the result of the power situation into account. We will not have a clear picture of this until the November data is available,” said BankservAfrica