The upgrade by international ratings agency Moody's Investors Service of South Africa's country ceilings for foreign currency debt and bank deposits to Baa1 from Baa2 confirms South Africa's good news story, National Treasury Director General Lesetja Kganyago told I-Net Bridge on Wednesday.

"The upgrade is good news as it lowers our country risk premium and therefore the cost of capital. It confirms our good news story, which has already been reflected in foreign investor optimism and should result in increased foreign direct investment in South Africa," Kganyago said.

Moody's said the upgrade was principally due to the substantial strengthening of the country's foreign reserves position.

Moody's placed South Africa on ratings watch on October 14 2004 and the upgrade was widely expected, especially after the third quarter 2004 showed the highest economic growth since 1996.

At the time, Kganyago told I-Net Bridge that South Africa's growth acceleration was broad-based and it was striking that after 24 consecutive quarters of growth, instead of slowing down, the economy had achieved the highest quarterly growth rate since the first quarter of 1996.

South Africa's third quarter 2004 gross domestic product (GDP) growth increased by 5.6% on a quarter-on-quarter (q/q) seasonally adjusted annualised (saa) basis from a revised 4.5% (initial estimate 3.9%) in the second quarter, Statistics South Africa (Stats SA) said.

"The figures were very positive and confirm that the economy is very strong. In 1996 we were coming off a low base, but now the growth is broad-based. What is remarkable is that those sectors considered sensitive to the strong rand, such as mining and manufacturing, have also had a very good performance," Kganyago said.

Mining grew by 6.2% q/q saa in the third quarter after growth of 3.2% in the second quarter, while manufacturing expanded by 6.3% q/q saa in the third quarter following increases of 6.1% in the second quarter and 4.9% in the first quarter.

Only two sectors (electricity, gas and water as well as general government services) had q/q saa growth rates in the third quarter of less than 4%, while two (agriculture 14.7% and construction 10.3%) had double-digit growth rates.

Last year Finance Minister Trevor Manuel said that structural changes that have been implemented over the past decade of freedom will support faster South African economic growth, raising growth from an average of only 1% in the decade prior to April 1994 to an average of 3% in the subsequent decade with the prospect that growth will average more than 4% in the decade ahead.

"We have just entered the 24th quarter of continuous positive growth.
This
marks the longest structural expansionary phase in the history of the South African economy. We have also witnessed a remarkable transformation in the structure of the economy. A largely natural resourced based economy has given way to a more modern, dynamic and resilient economy in which higher value added manufacturing and service are thriving," Manuel said.

Manuel noted that marked improvements in tax policy and administration have been the cornerstones of the turnaround in overall fiscal performance.

"Just last month, Moody's Investors Service announced that it has placed

South Africa's country rating on review for a possible upgrade. This was in recognition of the country's significant improvement in external liquidity, our modest reliance on external debt financing, and our macroeconomic policies.

Within one week of this announcement Fitch Ratings revised the outlook on South Africa's sovereign rating from stable to positive, an unprecedented vote of confidence in the South African economy," Manuel said.

"A growth rate of 4% and beyond is eminently achievable for this economy in the years ahead. Not, of course by government working alone. But, by every worker and every entrepreneur coming together to give expression to fuel our acceleration," Manuel said.

However, Moody's also emphasised that South Africa faces formidable long-term challenges related to chronic poverty and unemployment, whose grip has become more intractable with the spread of HIV/Aids. These problems are being addressed gradually, with skills training, education budgets, targeted government spending, national health insurance, and hopefully, black economic empowerment initiatives that will benefit the broader population.

The government's response to HIV/Aids has been frustratingly inadequate, although a substantial increase in resources is finally being channeled in the area such as through the fledgling anti-retroviral treatment programme.

"In facing these challenges, it would seem that the African National Congress government is not complacent, in spite of having been elected last April by a record margin and rightly boasting considerable economic and political success in the first decade after the democratic transition. The authorities appear determined to record further progress towards bridging wide income disparities through both public and private sector efforts. Moody's acknowledges the sensible motivations behind these strategies, but cautions against an overly expansive fiscal stance that would endanger policymakers' hard-won reputation for fiscal prudence."

Kganyago acknowledged Moody's concerns, but said the February 23 2005 Budget would show that a more expansionary fiscal stance was sustainable and would remain cautious.

I-Net Bridge