The Standard & Poor's building is seen in New York. Picture: Jessica Rinaldi

Key challenges facing South Africa were unemployment and a widening current account deficit, ratings agency Standard & Poor’s (S&P) said in a note released yesterday.

The unemployment rate hovers close to 25 percent; and the current account deficit – the gap between revenue from exports of goods and services and the import bill – was equal to 3.3 percent of gross domestic product (GDP) last year.

S&P Africa chief economist Jean-Michel Six called for “vigorous labour market reforms and a skills development push” to address unemployment.

He predicted the current account deficit would rise this year to 4.2 percent of GDP. And he noted South Africa depended on foreign direct investment and portfolio flows to finance the deficit. “This dependence could become a liability if sudden shifts in global risk appetite dry up portfolio flows.”

Six forecast growth of 2.7 percent this year, below the Reserve Bank’s forecast last month of 2.9 percent. His conservative estimate is based on South Africa’s dependence on export revenue at a time when economic conditions abroad are forcing spending cuts.

Recession in parts of Europe and slowing growth in the rest of the world are shrinking global export markets.

“South Africa’s growth performance puts it in the middle of its middle-income peer group: since 2005 the domestic economy has outperformed Thailand and Mexico but has fallen behind Brazil and India. This is because the South African economy continued to suffer from supply shortages, including those resulting from infrastructure bottlenecks and the skills shortages.”

In terms of GDP per capita, South Africa remains below Brazil and Mexico but well ahead of India.

The note stressed the need to improve infrastructure. “On the back of the government’s infrastructure drive, the ratio of investment to GDP recovered to 19.3 percent in 2010 from 17 percent in 2005, but was still down from 23 percent in 2008. Last year, this ratio sank back slightly to 18.9 percent.”

Referring to the 372 000 new jobs last year, which reduced the unemployment rate from 25 percent to 24 percent, Six said the improvement was misleading. “The number of discouraged workers rose by 108 000, which reduced the size of the workforce.”

He noted the Reserve Bank calculation that GDP growth would need to top 7 percent to meaningfully and sustainably reduce unemployment. “South Africa hasn’t seen such growth in the past decade,” he said.

S&P identified the recent acceleration in bank loans to the private sector as a risk – though at 9 percent in the 12 months to March growth is well below the 20 percent to 25 percent year-on-year growth seen between 2005 and 2008.

South Africa has a BBB+ rating with a negative outlook from S&P.