South Africa’s economy adjusting well to recession – Fitch

South Africa’s economy is adjusting to the global recession “quite well,” while political risk has eased because of a “smooth” transfer of power to President Jacob Zuma, Fitch Ratings said.

While the economy will probably contract between 1 percent and 2 percent this year, that is less than most countries with the same credit rating, Fitch director of sovereign ratings Veronica Kalema said in a statement today. Fitch kept South Africa’s foreign currency credit rating at BBB+, with a ‘negative’ outlook.

South Africa’s rand has climbed 21 percent against the dollar this year, while the benchmark FTSE/JSE Africa All Share index has gained 11 percent as expectations of an easing in the global recession boosts investors’ appetite for higher-yielding assets. Political risk has also diminished after Zuma, 67, was elected president in May and pledged to maintain economic policies, Fitch said.

“South Africa is weathering the global recession and credit crunch quite well compared to its rating peers,” Kalema said. “Some of the imbalances in the economy are starting to ease.”

South Africa’s credit rating could be downgraded if the economic recovery is weaker than currently expected, making it more difficult for the government to repay its debt, Fitch said. Political risk also hasn’t disappeared, with riots over a lack of services in some townships since last week a threat to stability, it added.

Deficits

Falling tax revenue will probably widen the budget deficit to 6 percent of gross domestic product in the year through March 2010, Fitch said, compared with the government’s estimate of 3.8 percent. The current account deficit, the broadest measure of trade in goods and services, will probably ease to between 5 percent and 6 percent of GDP this year, Fitch said.

Restoring the credit rating outlook to ‘stable’ would depend on whether “the country navigates the downturn over the next 12 to 18 months without a sharp deterioration of its credit metrics and with macroeconomic stability intact,” it added.

South Africa’s gross domestic product fell an annualized 6.4 percent in the first quarter, pushing Africa’s biggest economy into recession for the first time in 17 years. The government will publish new growth forecasts in October in the Medium-Term Budget Policy Statement.

Source: Bloomberg