Moody’s warns that South Africa is heading for trouble

Ratings agency Moody’s says that low economic growth and rising debt burden in South Africa could see socioeconomic tension intensify and impede policy reforms.

In a research note published on Tuesday (18 May), the agency said that the country’s credit profile was balanced, with its low level of foreign currency debt and a strong core of institutions counting in its favour, Reuters reported.

However, it warned that a number of growing fiscal and employment issues could lead to trouble.

“Credit challenges include structurally very weak growth and a high government debt burden that will continue to rise without comprehensive economic and fiscal reforms,” Moody’s said.

“Socioeconomic inequalities also intensify tensions that drive political risk and complicate policy efforts.”

Moody’s this month decided against making any decisions on South Africa’s credit rating, which currently sits two levels deep into sub-investment grade – or “junk” – at Ba2, with a negative outlook.

South Africa’s socioeconomic inequalities will likely be further exacerbated by a record-high unemployment rate, as citizens are left with no means to uplift themselves and increasingly take their frustrations out on the government.

Statistic South Africa’s unemployment numbers for Q4 2020 show that South Africa’s unemployment rate has hit its highest point since the Quarterly Labour Force Survey (QLFS) was started.

The number of employed persons increased by 333,000 to 15 million in the fourth quarter of 2020, it said. Meanwhile, the number of unemployed persons increased by 701,000 to 7.2 million compared to the third quarter of 2020.

Government and public sector unions are also locked in wage negotiations, with labour threatening industrial action unless demands are met.

After insisting that South Africa’s 1.3 million public servants would not get salary increases or adjustments at all over the next three years, the government had an abrupt change of mind at the weekend., the Daily Maverick reported.

The government has now tabled a “once-off” salary adjustment of 1.5% for public servants including doctors, nurses, teachers, police officials and others.

South Africa’s expenditure reduction is anchored on containing the public sector wage bill over the next three fiscal years.

Another decision looms 

Credit rating agency S&P Global is expected to publish its review for South Africa on Friday (21 May), in what could be another test for the country’s economy.

Analysts believe that S&P is likely to maintain a BB- rating with a stable outlook.

“The external rating agencies are likely to review their ratings before the next scheduled round of reviews in November 2021 if the public sector wage negotiations are settled at a level that will impose a higher spending commitment on the fiscus,” Nedbank said in a research note.

“S&P Global Ratings and Fitch Ratings will be reluctant to move a country with reasonably solid institutional governance and deep local financial markets below the psychological hurdle of a B rating.

“This hesitancy is likely to delay further downgrades for at least a year. Moody’s and Fitch downgraded their ratings in November 2020, which may persuade them to adopt a ‘wait-and-see’ at least until the 2022 budget.


Read: Price hikes to hit South Africa in the coming months

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Moody’s warns that South Africa is heading for trouble