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Research Update:

South Africa Long-Term FC RatingLowered To 'BBB-'; LC RatingLowered To 'BBB+' On Ongoing WeakGrowth; Outlook Stable

Primary Credit Analyst:

Ravi Bhatia, London (44) 20-7176-7113; [email protected]

Secondary Contacts:

Christian Esters, CFA, Frankfurt (49) 69-33-999-242; [email protected]

Gardner T Rusike, Johannesburg +27 (11) 214 1992; [email protected]

Analytical Group Contact:

SovereignEurope; [email protected]

Table Of Contents

Overview

Rating Action

Rationale

Outlook

Key Statistics

Related Criteria And Research

Ratings List

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 13, 2014 1

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Research Update:

South Africa Long-Term FC Rating Lowered To'BBB-'; LC Rating Lowered To 'BBB+' On Ongoing

Weak Growth; Outlook Stable

Overview

A prolonged strike in the platinum mining sector, as well as weak

domestic and external demand, has led to a contraction in GDP in the

first quarter of 2014 and is likely to depress second-quarter and

full-year GDP growth rates and reduce South Africa's fiscal flexibility.

In addition, current account deficits are relatively high, and their

financing relies on potentially volatile capital flows.

We are therefore lowering the long-term foreign currency rating on South

Africa to 'BBB-' from 'BBB' and the long-term local currency rating to

'BBB+' from 'A-'.

The stable outlook reflects our view that current labor tensions will be

resolved and that lackluster economic performance will not affect South

Africa's fiscal and external balance beyond our revised expectations.

Rating Action

On June 13, 2014, Standard & Poor's Ratings Services lowered the long-term

foreign currency sovereign credit rating on the Republic of South Africa to

'BBB-' from 'BBB' and the long-term local currency rating to 'BBB+' from 'A-'.

We also lowered the short-term foreign currency rating to 'A-3' from 'A-2' and

affirmed the short-term local currency rating at 'A-2'. The outlook is stable.

We also affirmed the long- and short-term South Africa national ratings at

'zaAAA' and 'zaA-1'.

Rationale

The downgrade reflects our expectation of lackluster GDP growth in South

Africa, against a backdrop of relatively high current account deficits, rising

general government debt, and the potential volatility and cost of external

financing.

A prolonged strike in the platinum sector, as well as weak domestic and

external demand, led GDP to contract in the first quarter of 2014 and is

likely to depress second-quarter GDP growth. The strike has led to a 25%

contraction in mining and quarrying output, and contributed to the overall

economy contracting by 0.6% of GDP in the first quarter of 2014. It will

likely lead either to another contraction or to only-feeble growth in the


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second quarter as well as disappointing growth for the full year.

We now expect full-year GDP growth of 1.9% in 2014, rising to 2.9% in 2015 and

3.2% in 2016. This follows slow growth of 1.9% in 2013 and 2.5% in 2012, also

partially due to prolonged strikes in the automotive sector in 2013 and the

mining sector's wildcat strikes of 2012, and highlights a prolonged lackluster

period for a country at this stage of development.

While South Africa's fiscal outturn has held up so far, the fiscal stance over

the next few years may become exposed to lower-than-expected economic growth,

pressures from a new round of public-sector wage negotiations, and increased

public spending needs. Although we expect the treasury to abide by its

expenditure ceiling, slowing growth may reduce revenues and possibly place

overall fiscal targets beyond reach.

General government debt, net of liquid assets, increased to 40% of GDP in

2013, from 23% in 2008, and we expect it to reach 46% by 2017. Although little

of the government's debt stock is denominated in foreign currency,

nonresidents hold 37% of the government's rand-denominated debt.

The ratings are also constrained by sizable current account deficits. Although

the rand floats and is an actively traded currency (according to the BIS

triennial survey of foreign exchange dealing, it is traded in 1.1% of global

foreign-exchange contracts), the portfolio and other investment flows that

finance these deficits can be volatile and can vary in price. Movements could

come from global changes in risk appetite or from foreign investors

reappraising prospective returns in the event of growth or policy slippage in

South Africa. While capital inflows have resumed since February 2014--after a

period of withdrawal--another reappraisal of risk is possible. Slow growth and

strikes may heighten both fiscal and external pressures.

While we think that President Jacob Zuma's newly elected administration will

continue the policies of his first administration, which controlled fiscal

expenditure and fostered broadly stable prices, we do not believe it will

manage to undertake major labor or other economic reforms that will

significantly boost GDP growth. At the same time, we also do not believe the

ANC-led government will entertain radical policies (such as the

nationalization of mines).

With 2014 per capita GDP estimated at $6,405, South Africa is a middle-income

country. We consider its economy to be diverse, yet with wide income

disparities. Per capita GDP growth has averaged a moderate 2.2% per year overthe past 10 years and we forecast it to fall to an average of 2% in 2014-2017.

We consider South Africa's contingent liabilities to currently be "limited,"

under our criteria. Nevertheless, the government has South African rand (ZAR)

350 billion (about 10% of GDP) available in potential guarantees for the

state-owned utility Eskom. Eskom currently uses about ZAR120 billion of these

guarantees. Eskom's operating margins have been hurt by the lack of rate

relief from the regulator as well as other factors and we believe Eskom's


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funding needs may require the government's guarantee envelope to increase by

2017.

The long-term local currency sovereign rating on South Africa is two notches

above the long-term foreign currency sovereign rating. This is because we

believe that the sovereign's flexibility in its own currency is supported by

the South African Reserve Bank's independent monetary policy and a large

active local currency fixed-income market.

Outlook

The stable outlook reflects our view that current labor tensions will be

resolved and that lackluster economic performance will not affect South

Africa's fiscal and external balance beyond our revised expectations.

We could lower the ratings if South Africa's business and investment climate

weakens further, for instance if labor disputes fester. We could also lower

the ratings if external imbalances continue to increase, or funding for South

Africa's current account or fiscal deficits becomes more difficult or costly.

We could raise the ratings if an improvement in investment and economic growth

prospects produces stronger government and external debt positions than we

currently expect.

Key Statistics

Table 1

Republic of South Africa - Selected Indicators

2007 2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f

Nominal GDP (US$ bil) 286 273 284 365 404 382 351 341 360 381 405

GDP per capita (US$) 5,769 5,434 5,584 7,098 7,775 7,298 6,637 6,405 6,698 7,035 7,410

Real GDP growth (%) 5.5 3.6 (1.5) 3.1 3.6 2.5 1.9 1.9 2.9 3.2 3.4

Real GDP per capita growth (%) 4.1 2.3 (2.7) 2.0 2.6 1.6 1.0 1.0 2.0 2.3 2.5

Change in general governmentdebt/GDP (%)

1.2 2.2 7.4 6.9 6.7 5.7 5.6 5.0 5.2 4.7 4.7

General governmentbalance/GDP (%)

1.7 (1.1) (6.6) (4.4) (3.8) (4.3) (4.0) (4.3) (3.9) (3.8) (3.6)

General government debt/GDP

(%)

28.6 27.8 33.4 37.0 40.5 43.5 46.0 47.6 48.9 49.5 49.9

Net general governmentdebt/GDP (%)

24.0 23.3 28.0 30.7 33.7 37.6 39.9 43.5 44.5 45.5 46.2

General government interestexpenditure/revenues (%)

8.4 8.0 8.6 8.7 9.1 9.7 10.0 10.5 10.5 10.5 N.M.

Oth dc claims on residentnon-govt. sector/GDP (%)

88.3 90.4 84.7 80.9 77.9 80.5 79.1 79.3 80.0 82.8 85.4

CPI growth (%) 6.1 9.9 7.2 4.3 5.0 5.6 5.7 6.0 5.7 5.6 5.4

Gross external financingneeds/CARs +use. res (%)

117.6 115.6 110.9 99.9 100.8 104.4 109.3 110.2 111.1 112.3 113.3


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Table 1

Republic of South Africa - Selected Indicators (cont.)

Current account balance/GDP(%)

(7.0) (7.2) (4.0) (2.0) (2.3) (5.2) (5.8) (5.4) (5.5) (5.4) (5.4)

Current account balance/CARs(%)

(20.6) (18.9) (14.0) (6.6) (7.3) (16.7) (17.6) (16.9) (17.1) (17.6) (18.0)

Narrow net external debt/CARs(%)

(0.7) 1.3 (5.1) 1.4 3.8 22.5 36.0 43.9 48.1 50.8 53.6

Net external liabilities/CARs (%) 97.7 23.0 68.9 86.9 23.9 26.2 34.1 52.9 67.8 83.6 99.4

Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the nationaldefinition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end ofthe prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net externaldebt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minuspublic-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negativenumber indicates net external lending. CARs--Current account receipts.

The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Psindependent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Related Criteria And ResearchRelated Criteria

Sovereign Government Rating Methodology And Assumptions, June 24, 2013

Methodology For Linking Short-Term And Long-Term Ratings For Corporate,

Insurance, And Sovereign Issuers, May 7, 2013

Criteria For Determining Transfer And Convertibility Assessments, May 18,

2009

Understanding National Rating Scales, April 14, 2005

Related Research

Eskom Holdings SOC Ltd., May 19, 2014

Sovereign Defaults And Rating Transition Data, 2013 Update, April 18,2014

South African Utility ESKOM 'BBB' Ratings Affirmed; SACP Revised Downward

To 'b-' On Weakening Metrics; Outlook Negative, Oct. 14, 2013

Banking Industry Country Risk Assessment: South Africa, July 8, 2013

In accordance with our relevant policies and procedures, the Rating Committee

was composed of analysts that are qualified to vote in the committee, with

sufficient experience to convey the appropriate level of knowledge and

understanding of the methodology applicable (see 'Related Criteria And

Research'). At the onset of the committee, the chair confirmed that theinformation provided to the Rating Committee by the primary analyst had been

distributed in a timely manner and was sufficient for Committee members to

make an informed decision.

After the primary analyst gave opening remarks and explained the

recommendation, the Committee discussed key rating factors and critical issues

in accordance with the relevant criteria. Qualitative and quantitative risk

factors were considered and discussed, looking at track-record and forecasts.


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The chair ensured every voting member was given the opportunity to articulate

his/her opinion. The chair or designee reviewed the draft report to ensure

consistency with the Committee decision. The views and the decision of the

rating committee are summarized in the above rationale and outlook.

Ratings List

Downgraded; CreditWatch/Outlook Action

To From

South Africa (Republic of)

Sovereign Credit Rating

Foreign Currency BBB-/Stable/A-3 BBB/Negative/A-2

Transfer & Convertibility Assessment BBB+ A-

Senior Unsecured BBB+ A-

Senior Unsecured BBB- BBB

Downgraded; CreditWatch/Outlook Action; Ratings Affirmed

To From

South Africa (Republic of)

Sovereign Credit Rating

Local Currency BBB+/Stable/A-2 A-/Negative/A-2

South Africa National Scale zaAAA/--/zaA-1

Development Bank of Southern Africa Ltd.

Senior Unsecured* BBB+ A-

*Guaranteed by the Republic of South Africa.

Complete ratings information is available to subscribers of RatingsDirect at

www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by

this rating action can be found on Standard & Poor's public Web site at

www.standardandpoors.com. Use the Ratings search box located in the left

column. Alternatively, call one of the following Standard & Poor's numbers:

Client Support Europe (44) 20-7176-7176; London Press Office (44)

20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm

(46) 8-440-5914; or Moscow 7 (495) 783-4009.


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