Global ratings agency Fitch Ratings said during a teleconference on Monday afternoon that its outlook downgrade to negative for SA was largely related to the extent of its current account gap at a time when supply to emerging markets becomes “much reduced”.

Head of Sovereign Ratings for Europe, the Middle East and Africa, Brian Coulton, said it was very much a “prospective signal” as the country had not to date been directly affected by the global credit crisis.

He says Fitch foresees a current account gap of -8 percent in 2009 in SA. The National Treasury has it at -7.8 percent.

“SA built up significant imbalances before the shock,” he said, noting that the current account deficit of -8 percent increases risks of a “hard landing” in 2009.

“Inflation [13 percent] is also very high relative to the [3-6 percent] target and could be kept high due to the [weak] rand,” he added.

“It will be relatively difficult for the reserve bank to cut interest rates aggressively,” he pointed out.

Coulton also noted that SA's political transition created risks as up until now the macro-economic framework had been one of the country's key strengths.

Political risk

“There is an increasing risk that political risk on that regime will increase,” he said.

Global head of Fitch's Sovereign Ratings, David Riley, said in answer to a question that “the world has moved on since June” [when Fitch changed its outlook for SA from positive to stable].

“The length of time we are expecting the global credit markets to be under significant pressure is much longer than before.”

He added in answer to a question from the SA Treasury that the decision was “not a statement about the policy measures that have been taken to date”. Treasury had earlier criticized the move as overlooking certain material facts about the macro-economic and fiscal frameworks and that flows were still coming into the country.

“The macro policies in SA have been an important support,” said Riley, also pointing to the stability of the banking system and the lack of currency mismatches in the private sector.

Largest financing gaps

However, he emphasized: “SA has one of the largest financing gaps of any of the emerging markets we looked at in this rating review.”

“This is a key point as we do see tensions in policymaking - we forecast an eight percent current account deficit next year.”

“It is very simple - the risk of a sharp economic adjustment has gone up,” said Riley.

He also raised concerns about SA meeting the implied reduction in domestic spending that will be required to reduce the gap.

Riley concluded by saying that he felt forecasts of three percent growth were optimistic: “One to two percent economic growth in SA in 2009 will be a good outcome.”

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