Here's looking at you SA

Published: 01-MAR-04

How does the international community rate South Africa? Francoise Botha looks at the country's international debt rating in the context of the government's priorities.

Not impoverished enough to attract the attention of the United Nations, and not first world enough to be a serious international player, South Africa is caught in a formidable middle ground as it strives to improve the quality of life of all its citizens.

Like many African nations, South Africa's success largely depends on international perceptions of the risks of doing business with this country and her future growth outlook. The need for a shift in priorities was spelled out last year by international debt rating agency Standard & Poor (S&P;).

The message delivered was that South Africa could not expect any further international credit upgrades unless Government's economic policies started delivering faster economic growth and higher levels of social delivery and job creation. Faster growth was key, as this would entrench political and social stability. However, S&P; raised South Africa's long-term foreign currency rating from START PULL QUOTEBBB-minus to BBB and its local currency rating from A-/A-2 to A/A-1.END PULL QUOTE These are internationally accepted ratings, and the more remarkable in view of the many global 'downgrades' (36) in the first two quarters of 2003.

Despite the improvement in South Africa's rating and the positive signal this sends to the international community, no further upgrades are on the cards of the country in the foreseeble future. It is thus expected that the rating will stay in place for some time, especially given the Government's announcement in October last year that economic growth was unlikely to reach 3 percent in 2003.

Konrad Reuss, sovereign ratings managing director of S&P;, said that much depended on how quickly the government reacted to the messages given. "The time has come for the ANC to deliver on its election promises of economic growth and job creation," he said. With unemployment at around 40 per cent, job creation needs urgent and extensive attention.

Konrad Reuss, sovereign ratings managing director of S&P;, said the ratings would be 'on hold' until the desired results were seen. 'It all depends on how quickly Government can deliver on these issues', he said. The strong message that the international community is sending South Africa is that while the transition to democracy has been stable, it is now time for the ANC to deliver on its election promises - economic growth and job creation. With unemployment levels estimated to be around 40 per cent, job creation is probably the biggest stumbling block Government faces at present.

S&P;'s report puts the spotlight on low levels of domestic savings and investment, labour market rigidity and the HIV/AIDS pandemic as burdens on South Africa's economy in the coming decade. The government must realign its priorities if is to retain the international community's support.

Reuss emphasised that South Africa was 'unlikely to achieve growth much above 4 percent over the medium tern - a level that would allow a more rapid amelioration of the country's chronic unemployment and social problems.' Statistics released by the United Nations in July last year estimate that a minimum growth rate of 3 percent is required in order to reduce poverty by only 50 percent by the turn of this century.

Recent improvements in the exchange rate of the rand will assist the government, as improved levels of foreign reserves can be achieved at a lower cost. Tito Mboweni, Governor of the Reserve Bank, made a commitment to improve the country's foreign reserve holdings after the interest rate cut in October 2003. The continued privatisation of state assets, and the inflow of foreign investment will boost the government's attempts to achieve this aim. This should also assist in any further improvement in SA's ratings.

Concerns have been raised about the likely replacement of two government figures - Trevor Manuel and Tito Mboweni. Manuel, who heads up the National Treasury, is one of the world's longest-serving finance ministers, and Mboweni's term as central bank governor is up for renewal next year. However, according to Reuss, there is a strong framework in place, which should not be affected by changes in individual portfolios.

This is good news for South Africa, which depends on foreign loans to finance its budget deficit. The stronger rating makes it 'cheaper' for South Africa to borrow offshore. And with a stronger rand, repayment of this debt will not put as much of a dent in the country's meagre foreign reserves stockpile.

So, just how does the international community rate South Africa? Pretty well, all things considered.

  • This is an edited article that first appeared in the First Quarter 2004 edition of Acumen magazine, published by Picasso Headline.

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