Robert Laing

Robert Laing

Though South Africa came off lightly in a generally poor report card on emerging markets issued by credit ratings agency Fitch on Sunday, the National Treasury appears to have been stung by concerns Fitch raised.

Fitch decided to hold SA's sovereign credit rating at BBB+ for the time being, but changed its outlook from stable to negative, indicating it thinks SA's creditworthiness will deteriorate.

Fitch downgraded the sovereign credit ratings of Bulgaria, Hungary, Kazakhstan and Romania. The first three maintained their "investment grade" triple-B ratings, falling from BBB+ to BBB or BBB-. But Romania fell from BBB to BB+, dropping it into "speculative grade", meaning it will probably have to pay higher returns on government bonds to compensate for a higher risk rating.

SA's outlook downgrade to negative follows June's drop from positive to stable which dashed hopes of SA advancing from the barely investment grade BBB range into the A credit bracket.

The Treasury responded to Fitch's second outlook downgrade by issuing a statement yesterday denying the ratings agency's concerns: "The Fitch Ratings Agency suggests that if South Africa's growth slows down as it predicts it will be hard for the authorities to maintain sound macroeconomic and fiscal policy.

"This is not supported by our recent history and overlooks certain material facts about the current macroeconomic and fiscal frameworks. The current macroeconomic projections of growth, revenue flows, and inflation already take into account all of the factors that are raised by the Fitch Ratings Agency."

Fitch said its rationale for revising SA's outlook from stable to negative was "very simple": "Given a current account deficit in excess of seven percent of gross domestic product that is largely funded by portfolio equity and debt flows, the risk of a 'hard landing' and even recession has increased significantly, given the expected reduction in capital and financial flows to emerging market economies.

"The policy challenges are compounded by relatively high inflation and in the event of a recession, the political commitment to the current macroeconomic policy framework could be tested."

Fitch was generally complimentary: "Unlike other emerging markets, South Africa has not needed to provide direct or indirect local or foreign-currency support to its banking system, which remains one of the strongest among emerging markets."

The Treasury said it was confident SA would not be downgraded during this period as "our economic fundamentals are sound, our policies are robust and our economic institutions vigilant".