Analysts warn that South Africa could see further downgrades in 2021

Major credit ratings agencies have made it clear that South Africa has run out of road when it comes to promised reforms – and the country is likely to see further downgrades in 2021 if the government continues to offer a lacklustre response, says financial services firm Momentum.

Moody’s and Fitch downgraded South Africa’s sovereign rating on 20 November and kept the rating outlook for the country at negative.

The agencies mentioned a deterioration in South Africa’s debt affordability, the poor financial performance of state-owned enterprises persistent challenges in the business environment posed by the labour market rigidities and unreliable power supply as the primary reasons behind their rating decisions.

“In our view, the conciliatory and consensus-building approach taken by the president to implement structural reforms suggest a more incremental pace of progress on achieving the country’s reform targets,” Momentum said.

“These efforts will contribute to a higher growth trajectory over time rather than reflect immediately in the form of significantly higher near-term growth rates.

“Consequently, efforts to arrest the increase in government’s debt burden will likely be constrained and could lead to further negative rating actions later in 2021, in our view.”

Not convinced 

The November downgrades indicate that ratings agencies are not convinced that government’s proposed economic recovery plans have much substance to them, says Paul Marais, managing director of NFB Asset Management.

The agencies said that government’s proposed fiscal consolidation plan is unconvincing and that the plan to freeze public sector wages is unlikely to happen. The latter proposal is already being contested through the judicial system.

The fact that both Moody’s and Fitch have pushed South Africa’s credit rating further into junk with a negative outlook points to the very real threat of further downgrades, Marais said.

He said that South Africa should expect further announcements regarding this issue in February next year around the time of the finance minister’s budget speech.

Marais  added that the downgrades have an implication for the country resulting in a higher cost of borrowing for the state.

At this stage South Africa can ill-afford a higher cost of borrowing, particularly given rising levels of debt to GDP and lower tax revenue collection as a result of the lockdown, he said.

Read: 6 events that could trigger more downgrades for South Africa

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Analysts warn that South Africa could see further downgrades in 2021