South Africa’s current account deficit has caused rating agency Fitch to adjust its outlook for the country’s credit rating from stable to negative for the first time since 1994. This comes after the outlook was adjusted from positive to stable in June. T he current account deficit, which is budgeted to reach 7,6% of the gross domestic product (GDP), or around R180 billion, in the current financial year is to blame for the adjustment. “Given a current account deficit in excess of 7% of the GDP, which is largely funded by portfolio equity and debt flows, the risk of a ‘hard landing’ and even recession has increased significantly,” Fitch said.
Although South Africa’s sovereign credit rating of BBB+ was left unchanged, the negative outlook could lead to a downgrade of the credit rating in the next 18 to 24 months. “We are slightly concerned that given the political transition South Africa’s policy framework could come under pressure,” Fitch’s Brian Coulton said. ”Were that to happen, it would have a negative effect on for the country’s credit-worthiness.” A country’s credit rating gives an lenders or investors an indication of whether it will be able to pay back a loan. A bad credit rating means a bigger risk and can lead to higher interest rates or the refusal of loans.
The National Treasury has criticised Fitch for the latest outlook, saying a drop in the rand will help narrow the country’s current account deficit without causing higher inflation. “At the heart of my disagreement is the fact that the ratings agencies are supposed to base their outlook on long-term factors,” said Lesetja Kganyago, Treasury director-general. “We don’t share their views of our ability to absorb the global recession.” South Africa is one of 17 emerging market economies whose rating outlooks were reviewed by Fitch. – Drieka Burger
