Following the outlook downgrade by Fitch on Monday, Standard & Poor's joined the chorus of concerns about South Africa's current account deficit in cutting its outlook to negative from stable on Tuesday.

At the same time, the 'BBB+/A-2' foreign currency and 'A+/A-1' local currency sovereign credit ratings, and the 'zaAAA/zaA-1' national scale ratings on South Africa, were affirmed. The Transfer & Convertibility assessment on South Africa remains 'A'.

"The outlook revision reflects pressures on South Africa's balance of payments, which increase the risk of further currency depreciation and a sharper-than-anticipated correction in the current account deficit, with attendant effects on prospects for trend growth and fiscal outturns," Standard & Poor's credit analyst Remy Salters said.

South African banks have had limited exposure to the effects of the deleveraging in developed banking sectors, and they should weather deteriorating asset quality at home as the cycle continues to turn and households repair their balance sheets. As a result, the sovereign's exposure to global developments is primarily of a macroeconomic nature, noted the analysts.

The global financial turmoil has contributed to a sharp depreciation of the South African rand since the beginning of 2008.

"We expect net portfolio flows to remain negative on average in the short term. Combined with a current account deficit expected at 22 percent of current account receipts in 2008, this should result in further rand weakness in the coming months," Salter added. "This will prolong inflationary pressures and delay monetary easing, at a time when growth is slowing rapidly in response to high interest rates, supply constraints, the commodity downturn, and dwindling external demand."

Part of the necessary adjustment in the balance of payments is increasingly likely to occur via a larger-than-anticipated correction in domestic demand, including through the delaying of public sector investments. In turn, that would feed through into a more protracted period of GDP growth below the four percent to five percent trend growth seen before this year, with ramifications for fiscal revenue dynamics. A deep and protracted slowdown would also add to policy pressures on the government following the upcoming general election, said S&P.

"After running surpluses close to one percent of GDP for the past two fiscal years, our base case is for the general government to return to deficits in the region of two percent of GDP for the next two years, and to remain in deficit in the period to 2011/2012," it adds.

"The negative outlook reflects the increasing weight of short-term macroeconomic risks to our base case. An orderly correction of the balance of payments and continued responsiveness to the risks associated with it, combined with continued prudent fiscal policies and an enduring commitment to growth-enhancing microeconomic reforms beyond the 2009 general election, would support the ratings," Salters said. "In the context of the turbulent global markets, however, a loosening of macroeconomic policies would put downward pressure on the ratings," concluded S&P.

Of the top rating agencies, only Moody's still has SA on a stable outlook. A negative outlook means SA's sovereign credit rating could be downgraded in 18-24 months.

The Treasury said on Monday that it did not feel a rating downgrade would happen in South Africa.

I-Net Bridge