Nov. 10 (Bloomberg) -- South Africa's Treasury criticized Fitch Ratings for lowering the outlook on the nation's credit rating, saying a drop in the currency will help narrow the current account deficit without pushing inflation to new highs.

``The exchange rate is the shock absorber that limits the growth of the current account by increasing the competitiveness of our exports,'' National Treasury director Lesetja Kganyago said in a telephone interview from Sao Paulo.

Fitch today lowered its outlook on South Africa's BBB+ rating, the third-lowest investment-grade level, to negative from stable on concern the nation will struggle to finance its current account deficit as the worst financial crisis since the 1930's dries up investment. The shortfall is expected to reach 7.6 percent of gross domestic product this year, Finance Minister Trevor Manuel said on Oct. 21.

South Africa's currency has fallen more than 30 percent against the dollar this year as investors sold almost 62 billion ($6.3 billion) more than they bought of the country's assets. The depreciation of the rand may stoke inflation which has exceeded the central bank's 6 percent ceiling for 18 consecutive months, Fitch said.

Fitch should ``point out that the fall in the currency has been accompanied by an even bigger drop in the oil price,'' said Kganyago. ``They raise inflation concerns but the fact is South Africa is running negative real interest rates.''

Inflation

Inflation slowed for the first time in more than a year in September, easing to 13 percent from a record 13.6 percent the previous month, the statistics office said on Oct. 29. The South African Reserve Bank has raised its key interest rate 10n times since June 2006 to a five-year high of 12 percent to curb the rate of price growth.

Oil prices have fallen almost 33 percent this year and more than 55 percent since reaching a record $147.27 a barrel on July 11. Crude traded at $64.62 a barrel today.

Fitch said the slump in the currency may push up interest rates, putting South Africa's economy at risk of a ``hard landing.'' The ratings company expects the $277 billion economy to expand by between 1 and 2 percent next year, according to Brian Coulton, a credit analyst at Fitch, who spoke by telephone.

South Africa's Treasury forecast 3.7 percent growth this year, 3 percent in 2009 and 4 percent in 2010, according to the mid-term budget statement released on Oct. 21.

``At the heart of my disagreement is the fact that ratings agencies are supposed to base their outlook on long-term factors,'' said Kganyago. ``We don't share their view of our ability to absorb the shock of a global recession.''

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

Last Updated: November 10, 2008 08:53 EST