Social issues may prevent Moody's uptick
October 26, 2007
By Gordon Bell
Johannesburg - South African public finances are sound and the financial system is healthy, while strong economic growth will continue, albeit as a slower pace.
This is the good news from Moody's Investors Service, but the rating agency warned yesterday that political and socioeconomic risks might dampen investor sentiment and cloud prospects for a ratings upgrade.
"South Africa's foreign exchange reserves have strengthened markedly since our last upgrade in 2005, which helps provide momentum for the foreign currency ratings," Moody's vice-president Kristin Lindow said in an annual country report.
"The current economic upswing, already in its eighth year, might be extended for another few years, though at a slower pace in the near term."
Africa's biggest economy expanded 5 percent last year, just off 2005's two-decade record of 5.1 percent but short of government targets considered sufficient to slash unemployment of about 25 percent.
Growth is widely expected to ease in the next two years, pinched by higher interest rates aimed at taming inflation.
Moody's said the rate hikes - which have lifted the repo rate 350 basis points to 10.5 percent since June last year - and the National Credit Act should ease growth amid signs that the economy was overheating.
It forecast expansion of 4.7 percent this year, slowing to 4 percent next year.
Moody's said monetary tightening should be near a peak, although there was a risk of a wage-price spiral if inflation expectations were not brought under control.
Official data on Wednesday showed the targeted measure of consumer inflation jumped to a four-year high of 6.7 percent year on year in September, further above the central bank's upper 6 percent limit.
Moody's said a big improvement in South Africa's external creditworthiness suggested a two-notch gap between its foreign and domestic currency ratings could be cut by raising the foreign currency rating.
The agency lifted its outlook on the Baa1 foreign currency rating to positive in June, while leaving unchanged the stable A2 domestic currency rating.
However, high unemployment, HIV/Aids, wide income disparities and rampant crime might contain ratings.
"Left unaddressed, these problems would pose concerns for longer-term economic and political stability," Lindow said.
Presidential succession was another source of uncertainty.
President Thabo Mbeki's desire to stand for a third term as ANC head at its December congress - even though he cannot serve as national president after 2009 - had complicated matters.
His bid could be seen as a way to stay deeply involved in decision making and to thwart a campaign for the presidency of the party and the nation by rival Jacob Zuma, Moody's said.
The agency added that South Africa had a well-balanced external debt profile and growing reserves that helped to mitigate concerns over a large current account deficit.
"In Moody's opinion, South Africa's free-floating exchange rate combined with the relatively low external debt burden suggests that the financial consequences of an outflow or reduction of foreign capital to finance the current account deficit would be mild."
Moody's predicted a relatively steady current account deficit at 6.8 percent of gross domestic product for next year.
It forecast $1 would fetch R6.90 at the end of this year and R7 at the end of 2008.
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