Quentin Wray
Johannesburg - Poverty and unemployment could stand in the way of international ratings agency Standard & Poor's (S&P) upgrading South Africa's credit rating, S&P's sovereign ratings managing director Konrad Reuss has warned.
This is despite S&P placing South Africa on a positive ratings watch in November. This change in outlook implied S&P thought the country's economic situation was improving and it was in line for an upgrade.
South Africa has a BBB-minus investment grade rating.
Investors use credit ratings to assess the risk that a country will default on its debt obligations. The better the rating, the lower the risk premium a country has to pay if it wants to borrow money on the capital markets.
Reuss, who was in South Africa this week as part of his annual assessment of the country, said the ratings committee would make its decision in the next four weeks.
It would "have to balance the good track record built up so far in fiscal policy and economic restructuring with the challenges out there: social problems, the wealth gap, unemployment and HIV/Aids", he said.
But Reuss gave finance minister Trevor Manuel's 2003/04 budget the thumbs up, saying that because it was clear the economy would not grow fast enough to generate the number of jobs needed, "the solution to poverty alleviation has to come from elsewhere. It is important that the budget delivers on the social issues ... the challenges are tremendous. This was a good balancing act but it is too early to say mission achieved."
South Africa has investment-grade ratings from all three major international ratings agencies: S&P, Moody's Investors Service and Fitch Ratings.
Last week Moody's upped the country's credit outlook from stable to positive, saying the move reflected confidence in the government's macroeconomic policies. In August, Fitch changed South Africa's outlook from stable to positive.
Reuss said S&P was worried the gradual increases in the pace of delivery over the past few years would not be enough to keep the electorate happy over the medium to long term.
If not, social and political stability could be undermined, raising fears that sensible fiscal polices would be replaced by "unsustainable, populist policies", he said.
However, over the past few years, the South African officials he spoke to were "more confident ... People are not suggesting any more".
He said the government "must be reaching the end game in how much more it can get out of the system from improved collection and efficiency".
Therefore, if it wanted to continue increasing social spending, "at some point the economy has to start growing faster than it has in recent years".
He said S&P viewed growth and distribution as the key issues that would determine South Africa's ratings over the medium to long term. "It is the question we focus on most."
Reuss said the stronger rand and slowing world economy meant the government's growth forecast of 3.3 percent for this year was too optimistic and growth was far more likely to come in at between 2.5 percent and 3 percent.