Wednesday, November 12, 2008

South Africa’s Credit Woes

The Times
The AP

Though South Africa’s banking system appears to be on solid ground and has not required a government bailout, the general outlook for its credit worthiness is negative. Fitch, the credit rating agency, recently changed its outlook from the country’s creditworthiness from stable to negative. Fitch raised concerns about South Africa’s current account deficit of 7% of its GDP. A country’s current account is a measurement of how much money is flowing out of a country compared to how much is flowing out. An current account deficit, generally speaking, means that a country is a debtor to other countries.

Given the global credit crunch, analysts are concerned that South Africa will not be able to fund its current account deficit given the lack of credit inflows. Investors have sold more of South Africa’s currency, the rand, then they have bought in South African assets. This has caused a large drop in the value of the Rand. Analysts are concerned with the potential for a “hard landing” in South Africa. A hard landing is when large economic growth is immediately followed by a recession.

Though Fitch lowered its credit outlook for South Africa, it did not lower its actual credit rating, which currently stands at BBB+. BBB+ is classified as “investment grade,” which means South Africa stands a decentafr chance of attracting some foreign investment, yet South Africa was hoping to earn an A-grade rating. An A-grade credit rating allows countries to pay lower interest rates on the bonds they issue abroad, and also signals investors that the country is a very safe place to invest.

South African officials do not agree with Fitch’s projections. They claim that their fiscal and macroeconomic policy is disciplined and that South Africa would be able to continue its recent economic growth. South Africa was only one of 17 emerging economies that Fitch reviewed, and compared to the rest (some of whom had their actual credit rating lowered) South Africa faired pretty well. Fitch generally praised the country’s recent economic policies in the face of a falling rand and somewhat high inflation.

1) South African officials seem confident in their fiscal policy. Is this out of necessity, so as not to appear risky in the world’s eyes, or because they truly believe their position is stable.
2) Do you think credit rating agencies should have the important role of rating countries’ worthiness? One credit rating agency could have a large impact on a country’s economy and its ability to raise funds. How would investors determine credit rating if it weren’t for agencies like Fitch?

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