JOHANNESBURG (Reuters) - S&P downgraded South Africa's outlook to negative from stable on Wednesday, citing the potential for a ratings downgrade if economic and social problems feed into the political debate ahead of 2014 elections.

But the Treasury rejected the ratings assessment of the political risk in Africa's biggest economy, saying political debate should not be confused with instability.

S&P said South Africa's near-term political pressures had eased and the Treasury remained committed to fiscal consolidation, but added problems such as high unemployment and a structural current account deficit persisted.

"The negative outlook reflects the potential for a downgrade if economic and social problems feed into the political debate in the run-up to the 2014 elections and consequently further put pressure on the policy framework," S&P said.

It reaffirmed South Africa's foreign and local currency ratings at 'BBB+/A-2' and 'A/A-1'.

President Jacob Zuma faces a challenge to the leadership of his ruling ANC later this year, amid criticism his government has not done enough to tackle unemployment, a broken education system and growing corruption.

Whoever is elected ANC leader is almost certain to be the party's nominee for the 2014 presidential election.

Responding to the S&P move on Wednesday, the Treasury said political debate and a vigorous exchange of ideas on policy options "are part and parcel of the fibre of a democratic dispensation".

"This cannot be construed as political instability," it said in a statement.

OUTLOOK DOWNGRADE HITS RAND

The rand fell more than 1.3 percent against the dollar and was the worst performer in a basket of 20 emerging market currencies, partly hit by the outlook downgrade.

This is the third outlook downgrade in four months for South Africa, after Fitch cut its outlook to negative in January following a similar move from Moody's in November. Both agencies cited political pressure as the reason for their move.

However, S&P did not put South Africa's rating on credit watch, which meant the chances of a cut in the short term were limited, Nomura emerging markets analyst Peter Attard Montalto said.

"It is only the course of medium-run policy dynamics that will perhaps eventually lead to a downgrade. Market reaction is likely to be somewhat contained given the risks S&P talk about are already well known," Montalto added.