South Africa’s ratings are weighed down by low growth potential, sizeable government debt and contingent liabilities, and the risk of rising social tensions due to extremely high inequality, the ratings agency said.
However, the ratings are supported by strong institutions, a favourable government debt structure, deep local capital markets and a healthy banking sector.
According to a press release, “GDP growth was weaker than expected in 1H18, but Fitch expects a recovery of investment after a prolonged period of contraction to drive GDP growth to 2.1% in 2019 and 2020, from 0.6% in 2018.”
“The president in September announced a package of measures to stimulate growth, focused on structural reforms as well as reprioritising expenditure. A revised mining charter has been approved, lowering uncertainty for the sector, but raising regulatory costs compared with the previous regime. Initiatives also include measures to strengthen the telecoms sector, raise competition, reduce bulk transport costs and boost tourism by easing visa requirements.
“However, in Fitch’s view the measures will take time to implement and are not sufficiently far-reaching to raise medium-term potential growth significantly. As a result, potential growth is expected to remain just below 2%. This is well below the historical ‘BB’ category median of 3.4% and only just above population growth of 1.6%.
“Over the medium term, low growth and high inequality could raise the risk of social tensions. They could also lead to pressure for policies that undermine fiscal sustainability.
“For example, the discussion about land reform, including expropriation without compensation, reflects frustration about a lack of progress on reducing inequality.
“The government has nevertheless made clear it recognises the risks of land reform and will ensure that associated policies will not negatively affect food security or economic growth,” the agency said.