Africa’s largest economy, with US$276 billion in GDP, is the continent’s rising power.  With 48 million people, it is not the continent’s most populous, with a lower population than oil-rich Nigeria (155 million) and Egypt (80 million), the world’s most populous Arab nation.  But South Africa is richer than these countries, in spite of its more skewed income distribution — South Africa has a Gini index of income inequality of 57.8, similar to Brazil’s, and worse than Egypt’s 34 and Nigeria’s 43.7.   And, with unemployment of 23%, this regional power has substantial structural challenges.

A national election in April-May 2009 occurred smoothly, after an intra-ANC power struggle resulted in the resignation of President Mbeki, post-Apartheid South Africa’s second president, following Nelson Mandela, the country’s George Washington and a major moral force in the world.  The ANC holds nearly two-thirds of the seats in the National Assembly, lording over a few much smaller opposition parties.  The ANC, which has held power for fifteen years, has much more to do to overcome the country’s nagging social problems and unleash its growth potential.

Fitch Ratings affirmed South Africa’s sovereign ratings this week, with the foreign currency rating of BBB+, the same as Libya’s ratings, but higher than all the other sixteen African nations Fitch rates.  South Africa is rated the same as Mexico, a notch higher than Russia, and two notches higher than Brazil and India.  Its credit strengths include low, though rising, public debt and good, though not stellar macroeconomic performance.  The economy grows less rapidly than other BBB sovereigns, expanding an average of 4.7% per year in the five years through 2007.  Its public debt is on the rise, given much needed infrastructure spending and a severe skills shortage.  Its banking system is strong relative to other emerging market economies (EMEs).  The economy has experienced only a modest slowdown as a result of the global economic crisis.  South Africa’s ratings were given a Negative Outlook in November 2008, along with many other EMEs, as Fitch concluded that the so-called “decoupling” of these economies from what was going on in the developed world was not a reality.  Since then, South Africa seems to have weathered the storm fairly well, with capital inflows resuming, though Fitch is taking a wait-and-see attitude.   South Africa’s wide current account deficit, at over 7% in recent years, financed in part by volatile portfolio capital, leaves the country vulnerable to external shocks.

Fitch published a report on South Africa this week, and its accompanying press release can be found below. 

“Fitch Affirms South Africa at ‘BBB+’; Outlook Remains Negative   

27 Jul 2009 6:23 AM (EDT)

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Fitch Ratings-London-27 July 2009: Fitch Ratings has today affirmed all of South Africa’s sovereign ratings. The country’s Long-term foreign currency Issuer Default Rating (IDR) is ‘BBB+’ and the Long-term local currency IDR is ‘A’, while the Short-term foreign currency IDR is ‘F2′. The Outlooks on the Long-term foreign and local currency IDRs remain Negative. Fitch has affirmed the Country Ceiling at ‘A’.

“South Africa is weathering the global recession and credit crunch quite well compared to its rating peers,” says Veronica Kalema, Director, Fitch’s Sovereign group. “Although GDP will fall by 1%-2% this year, this will be far less than most ‘BBB’ category sovereigns. Political risk has also eased since April’s smooth transfer of power to President Zuma. However, the post-election political landscape and its implications for policy is still unfolding, at a time when the budget deficit is rising sharply and the current account deficit, while diminished, remains large and presents continuing financing challenges.”

South Africa’s ratings have been on Negative Outlook since November 2008 when Fitch took negative rating action on a number of major emerging markets in the face of the sudden and fast deterioration of the global economic environment in the second half of last year. South Africa has been affected mainly through trade and capital flows channels; there were large portfolio outflows in Q408 and a sharp weakening of the currency. Though portfolio flows have since returned and the rand has recovered most of the ground lost since March 2009, the combined impact of global recession and a domestic cyclical downturn will be more broadly felt in 2009. Fitch’s earlier forecast of recession has been confirmed, but the agency now forecasts that GDP will contract by 1%-2% in 2009.

Revenue shortfalls mean the budget deficit could approach 6% of GDP in the current fiscal year (FY09: April 2009-March 2010) and remain high, albeit declining, in the subsequent two years. Fitch therefore expects the government debt ratio to rise from a low of 27% in FY08 to around one-third by FY10. External debt ratios are also forecast to rise as borrowing is stepped up to finance public sector investment and the current account deficit (CAD).

Several years of prudent fiscal policy give South Africa fiscal space to weather a temporary increase in the budget deficit without the debt ratio exceeding ‘BBB’ category medians. However, the increase in debt of the broader public sector, which includes non-financial public enterprises, will be much starker, as infrastructure spending is stepped up. In the longer-term, this investment will help the country ease some of the structural constraints to a higher growth potential, which will be key to improvement in the sovereign rating.

Falling inflation and slower private credit growth in response to earlier monetary tightening is also allowing a monetary stimulus. Interest rates have been reduced by 450 basis points since December. This will help support growth in H209 and into 2010. In addition, due to tighter regulation and supervision, the South African banking sector has been relatively insulated from the global credit crunch and although banking sector asset quality and profitability are worsening in the economic downturn, the sector is better placed than most “BBB” country banking sectors to support the recovery.

Some of the imbalances in the economy are starting to ease, with credit growth slowing sharply and domestic inflationary pressures abating. The CAD is also forecast by Fitch to narrow, though to a still relatively high 5%-6% of GDP. As this will not be fully covered by increased public sector borrowing and foreign direct investment, financing will still rely on portfolio flows, presenting a persistent risk to macroeconomic stability given continued volatile global risk appetite. High wage pressures also present a challenge to public finances, inflation and competitiveness.

A smooth political transition after the fourth post-apartheid general election, the most vigorously contested so far, has reduced short-term political uncertainty, strengthened democracy and should ease investor concerns as the country navigates the downturn. However, political risk has not diminished completely. Expectations have been raised and sporadic riots are a reminder that service delivery, which is a priority for the new government, has the potential to threaten political stability unless effectively addressed.

South Africa’s ratings could come under further downward pressure if economic recovery is weaker and more protracted than Fitch currently expects, leading to a worsening of key credit indicators. A weakening of the policy environment would also be ratings negative. However, if the country navigates the downturn over the next 12 to 18 months without a sharp deterioration of its credit metrics and with macroeconomic stability intact, the Outlook would be revised to Stable.

Contact: Veronica Kalema, London, Tel: +44 (0) 20 7417 6336; Richard Fox, +44 (0) 20 7417 4357.

Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email:  peter.fitzpatrick at fitchratings.com.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.”

In the first official meeting of the US-China Strategic and Economic Dialogue this week, which puts the Democratic stamp on the brainchild of Hank Paulson, Bush’s Treasury Secretary, Chinese Finance Minister Xie Xuren called on the U.S. to reduce its widening fiscal deficit.  In response, U.S. Treasury Secretary Geithner assured the Chinese that, once growth resumed, the Obama administration would do just that.  See today’s NYTimes article on the subject.  Yet a recent Economist article emphasizes the inconsistency of this goal with Obama’s laser focus on health care reform, which many believe will not be deficit-neutral.  The Chinese worry about the value of their massive holdings of U.S. treasuries (appx. $1.5 trillion).  Fiscal profligacy would mean dollar weakness.  One wonders why in the middle of a financial crisis, U.S. lawmakers feel that universal health care is so important, so much so that they are willing to risk U.S. sovereign creditworthiness.  Obamanomics is like Reaganomics in reverse.  Reaganomics argued that tax cuts and massive defense spending hikes would ultimately lead to higher revenues and a balanced budget.  Not very likely.  Obamanomics argues that fiscal stimulus and health care reform that reduces costs will yield more robust GDP growth and therefore room to cut deficits over the medium term.  Wishful thinking.  I guess Democrats understand that their massive legislative majorities will not continue forever, so they had better get their pet projects done now or never (including getting Judge Sotomayor confirmed).  Hopefully, America’s standing in the world, and therefore the value of China’s foreign exchange reserves,  will not suffer as a result.

Great op-ed by Aluf Benn, diplomatic editor/correspondent for Haaretz, in today’s NYTimes.  He asks, Where has Obama been on Israel?  Why hasn’t he spoken to Israelis directly, the way he has addressed everyone else from Ghanaians to Egyptians, Europeans to Latin Americans?  For sure, he is really busy, probably busier than any other president since FDR.  As he himself has emphasized, there is the bank bailout, the trillion dollar fiscal stimulus, two wars (one to wind down, one to wind up), a failing state (Pakistan), and health care reform (is that really necessary right now?), not to mention the controversy over the arrest of a Harvard professor who is a friend of his.  Yet he has said he is the one who can untie the Gordian Knot of the Arab-Israeli conflict by the power of his personality and the credibility he has in the Muslim world.  Well, Aluf Benn argues that he is losing credibility with Israelis, a key player in the conflict.  Moreover, he points out something important and elusive to most world leaders.  The difference between playing to American Jews and playing to Israelis.  You don’t have to go on and on about the Holocaust and link it to the Arab-Israeli conflict to placate Israelis.  Just visit Yad Vashem and then deal with the here and now.  American Jews are more interested in politicians reiterating their angst about the Holocaust than are Israelis.  Israelis prefer to hear about a plan to deal with Iran’s emerging nuclear weapons capability, about Hamas rockets in the south and Hezbollah rockets in the north, and about Israel being recognized as a Jewish state by the Muslim world.  Have a read…

What should the United States do about Iran and its nuclear program? Is diplomacy still an option? Before she left on her trip to India and Thailand, US Secretary of State Hillary Clinton said, “We remain ready to engage with Iran, but the time for action is now. The opportunity will not remain open indefinitely.”

Secretary Clinton raised the pressure on Tehran on Wednesday. Speaking at a televised town hall in Bangkok, she said, “We want Iran to calculate what I think is a fair assessment, that if the US extends a defense umbrella over the region, if we do even more to support the military capacity of those in the gulf, it’s unlikely that Iran will be any stronger or safer, because they won’t be able to intimidate and dominate, as they apparently believe they can, once they have a nuclear weapon.” Secretary Clinton hopes a “defense umbrella” over the Middle East will deter Iran from pursing nuclear weapons as it recalculates its own national security interests.

Is there any hope that Iran will negotiate with Washington? It’s doubtful that Iranian President Mahmoud Ahmadinejad will compromise. “They tried to interfere in our elections. They talked nonsense. They were rude. They fomented aggression against people’s wealth and property,” he told a crowd in the northwestern city of Mashhad last week. Ahmadinejad also argued that “as soon as the new government is formed, it will enter the global sphere with a power that is 10 times greater than that of the West and overthrow the West from its hegemonic position.”

Michael Singh, a fellow at the Washington Institute for Near East Policy, writes in the International Herald Tribune that when analysts debate if the US should engage Iran “it is a bit like me wondering whether I should invite Angelina Jolie over for dinner: The question isn’t really whether I should ask, but how on earth I would get her show up.”

Regardless, Washington should reach out to Tehran once the dust settles on the election. Talks are unlikely to curb Iran’s nuclear program, but providing Tehran with a credible offer will strengthen Washington’s options in the future. If negotiations work, great. If Iran rejects America’s overtures, the US will easily justify increasing pressure and imposing tough sanctions. An international consensus will be easier to form.

The threat of a nuclear-armed Iran is too great to ignore. And all options should be on the table, including diplomacy.

Photo from Patrick Demarchelier/Vanity Fair.

If the positions of the sun and the moon influence the future global balance of power, the solar eclipse seen today in Asia could mark the dawn of a new Asian century. This was the longest eclipse since July 11, 1991 (only months before the official dissolution of the Soviet Union) and there won’t be another eclipse as long until 2132.

Or, maybe not.

Photo from Yang Lei/Associated Press.

With a Friday prayer sermon by a former president and a call for a national referendum on the government’s legitimacy by another, the drama and crisis in Iran following the disputed elections are not over yet. When he spoke on Friday, former president Ali Akbar Hashemi Rafsanjani said many Iranians have doubts about the election and the aftermath was a “crisis.” On Sunday, the reformist former president Mohammad Khatami praised Mr. Rafsanjani’s words and said a referendum would help restore trust in the Republic. The actions breathed new life into the opposition.

Mr. Rafsanjani is an influential cleric believed to be the second most powerful person in Iran and his speech was historic. He called for the release of people arrested during recent protests and the removal of restrictions on the press and free speech. In an interview with the Council on Foreign Relations, Shaul Bakhash, a professor at George Mason University, said Mr. Rafsanjani “was cautious, but the reaction has been quite electric and perhaps unintentionally, he reopened the whole debate. He strengthened the hand of the opposition and kept alive the claim that the election was tampered with and is in some ways illegitimate.”

After Friday prayers, Roger Cohen, a columnist for The New York Times, argued that popular anger has not abated and “protest and debate in Iran will continue for some time.”

Mr. Rafsanjani’s speech, however, was barely shown on Iranian public television. Elham Gheytanchi, a teacher of sociology at Santa Monica College, and Babak Rahimi, an assistant professor at the University of California, San Diego, wrote in Foreign Policy that the government’s stifling of dissent and attempts to discredit the opposition show that “Iran’s crisis of legitimacy has reached its apotheosis.”

Of course none of this means the opposition has the upper hand. Ayatollah Ali Khamenei, the country’s supreme leader who has openly supported President Mahmoud Ahmadinejad and confirmed the results of the election, warned critics on Monday. “The elite should be watchful, since they have been faced with a big test. Failing the test will cause their collapse,” said Khamenei. “Anybody who drives the society toward insecurity and disorder is a hated person in the view of the Iranian nation, whoever he is.”

And while there have been disagreements among elite clerics, the Islamic Revolutionary Guards Corps seems committed to Ahmadinejad and Khamenei. The Revolutionary Guards enjoy economic, political and social power and play an important role in quelling dissent.

Karim Sadjadpour, an associate at the Carnegie Endowment for International Peace, noted that “the institution of the Revolutionary Guards has eclipsed the institution of the clergy, in terms of their political and economic clout. So while the cleavages amongst clerical elite is certainly significant, what would be a far more fatal blow to Ahmadinejad and Khamenei would be open dissent amongst the Revolutionary Guard elite, which we haven’t yet seen.”

For more, listen to The NewsHour discussion with Afshin Molavi, a fellow at the New America Foundation, and Hooman Majd, the author of The Ayatollah Begs to Differ: The Paradox of Modern Iran.

Photo from Ali Rafiei/AFP/Getty Images and clip from The NewsHour with Jim Lehrer.

Last week, the Chinese government said the country grew nearly eight percent in the year to the second quarter. Beijing’s economic stimulus and record bank lending have proven effective and China is in a good position to emerge comfortably from the Great Recession.

Do the new figures signal China’s economic resilience? Or is it too much of a good thing? Some analysts fear the loose monetary policy will create asset bubbles and a rise in nonperforming loans.

Photo from Reuters.

Two weeks after unrest erupted in Xinjiang, Beijing should reassess its policies towards and relations with ethnic minorities. Instead of a strong and uncompromising response, the Chinese government needs to protect rights and provide opportunities for real autonomy. Ethnic tensions must be reduced not used to justify harsher measures.

Minxin Pei, a senior associate at the Carnegie Endowment for International Peace, recently wrote in the Financial Times that “without immediate policy adjustments, these tensions could mushroom into debilitating low-intensity conflicts, distracting China’s leadership from economic growth and tarnishing the country’s international image.”

“The long-term challenge for Beijing is to question the core assumptions of its current policies toward both Xinjiang and Tibet and adopt a different strategy. Such a shift will be hard. Ethnic conflict is perhaps the most intractable problem, even for democracies. For one-party states, it is almost insoluble. But with so much at stake, Beijing has no choice but to search for a political approach that will give China’s ethnic minorities, particularly Uighurs and Tibetans, genuine autonomy under Chinese rule.”

(Minxin Pei also appeared on PBS NewsHour with Alim Seytoff, a spokesperson for the World Uighur Congress (see discussion above).)

The violence in Xinjiang is unlikely to prevent China’s rise in the near future. But lingering tensions and the possibility of future unrest could damage the country’s long-term prospects.

Clip from The NewsHour with Jim Lehrer.

“After decades of frustration, miscalculation, unrealized potential, India is now emerging as a factor in the global balance of power,” writes Shakti Prasad Srichandan in a Foreign Policy Association Feature published yesterday. He is a scholar at Jawaharlal Nehru University in New Delhi.

“In the coming years, it will have an opportunity to shape outcomes on the most critical issues of the twenty-first century like the construction of Asian stability, the management of globalization, war on terror, non-proliferation, climate change, energy security, WTO negotiations and the future of UN.”

Also, check out FPA’s new blog on India.

Image from the Stanley Foundation.

Are India’s foreign policy institutions undermining the country’s rise? Daniel Markey, a senior fellow at the Council on Foreign Relations, writes in this month’s issue of Asia Policy that “India’s own foreign policy establishment hinders the country from achieving great-power status.” He argues that India needs to reform and expand the foreign service and develop stronger foreign policy research by increasing access to information, investing in think tanks and improving university education.

“Institutions charged with researching, formulating, debating, and implementing foreign policy are too often underdeveloped, in decay, or chronically short of resources. In particular, India’s diplomatic service, think-tanks, and universities are not yet up to the task of managing an agenda befitting a great power. As a result, even a wealthier and more powerful India may remain politically inconsequential, unable to set forth and implement a realistic global agenda or to exercise international leadership.”

Figure from Asia Policy.