South Africa's National Treasury has given the thumbs down to a decision by Fitch Ratings to downgrade South Africa's outlook to negative from stable.

It notes that Fitch 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," said the Treasury in response to the news, which came through in the early hours of this morning.

Fundamentals are sound

The Treasury does not feel an actual rating downgrade is going to happen, as economic fundamentals are sound.

Instead, Treasury points out that capital inflows into the bond market have been strong in the past week, suggesting that financial conditions continue to stabilise.

Recent foreign direct investment inflows further suggests that South African growth prospects continue to be favourably viewed by foreign investors.

"The rise in investment from 15 to 22 percent of GDP over the past six years suggests that potential growth is likely to be higher in the future and South Africa is well placed to benefit from a recovery in the global economy," says Treasury.

Vodacom transaction

As testimony to some of the positive prospects for the South African economy, as recently as last week Telkom sold 15 percent of its shares in Vodacom to Vodafone, UK for R22.5-billion.

"This transaction represents an expression of confidence in the SA economy," said Treasury.

It adds that the budget framework sets aside R36-billion in a contingency reserve, including accommodating any unforeseeable shortfall in revenue collection if the economy slows further.

"South Africa is confident that it would not be downgraded during this period as our economic fundamentals are sound, our policies and robust and our economic institutions vigilant. South Africa's low debt ratio, large cash holdings and significant foreign exchange reserves also cushions the economy during times of global turbulence."

Treasury also emphasises: "Unlike a number of developed and emerging market countries, the South African government has not found it necessary to support its banking sector through the current financial crisis due to sound regulation, good capital adequacy ratios and sufficient liquidity conditions prevailing in the banking system."

"The banking system is underpinned by a sound macroeconomic policy framework."

Treasury notes that since the price of oil has fallen faster than the commodities that South Africa exports, South Africa's current account deficit is expected to moderate somewhat going forward.

Tough decisions

"South Africa took some tough decisions early on to slow household consumption expenditure, helping to reduce inflationary pressures. Inflation pressures have since abated, reflecting the success of monetary and fiscal policy and as oil and food prices have moderated."

It also clarifies that Fitch Ratings affirms South Africa's long-term foreign currency ratings of BBB+. This revision therefore does not constitute a rating downgrade.

"This revision must be seen in the context of the current global financial turmoil and its impact on emerging markets. The shift to a negative outlook takes place alongside 17 other emerging markets," concludes Treasury.

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