South Africa is fighting to preserve its last remaining investment-grade credit rating and avert a forced selloff of billions of rand of its debt after Moody\u2019s Investors Services gave it just over three months to get its finances in order.<\/p>\n
The ratings company cut the outlook of the nation\u2019s Baa3 foreign- and local-currency assessments, both of which are one step above speculative grade, to negative.<\/p>\n
That\u2019s after Finance Minister Tito Mboweni presented a rapidly deteriorating outlook in his medium-term budget policy statement, with gross government debt seen surging to 80.9% of gross domestic product in the 2028 fiscal year unless urgent action is taken.<\/p>\n
Moody\u2019s move places South Africa on the verge of a full house of junk ratings unless the government can develop a \u201ccredible fiscal strategy to contain the rise in debt\u201d in the budget review due February, it said.<\/p>\n
The ratings affirmation allows the continent\u2019s most-industrialized economy \u201ca narrow window to demonstrate faster and concrete implementation of reforms,\u201d according to the National Treasury. Economists fear the clock is running is out.<\/p>\n
\u201cIt\u2019s bad timing because we\u2019re already wrapping up the year and the budget is in February, which is already a short month,\u201d said Thabi Leoka, an economist and member of the Presidential Economic Advisory Council. \u201cWe actually don\u2019t have time to do what we have to do,\u201d she said.<\/p>\n
A downgrade would see South Africa without an investment-grade ranking for the first time in 25 years. That would cause it to fall out of the FTSE World Government Bond Index, which could prompt a selloff and outflows of as much as $15 billion, according to Bank of New York Mellon Corp.<\/p>\n
With limited scope to raise taxes in an economy forecast to grow just 0.5% for the year, the Treasury is reducing spending by a total of R50 billion ($3.4 billion) by 2022 to plug the widening budget gap, but it needs to find another R150 billion of savings to achieve a target of a primary balance by 2023.<\/p>\n
Mboweni is redoubling efforts to cut the state\u2019s payroll costs, which make up 35.4% of national spending. The Treasury is also forging ahead with plans to split loss-making power utility Eskom Holdings SOC Ltd into three units and hasn\u2019t ruled out selling non-core assets or increasing private-sector participation in state-owned companies.<\/p>\n
However, it will have to reach agreements with powerful labor unions to implement the proposals.<\/p>\n
\u201cIf there\u2019s no meaningful action, Moody\u2019s will have to pull the trigger,\u201d said Elize Kruger, a senior economist at NKC African Economics.<\/p>\n
Moody\u2019s first came close to cutting South Africa to junk in December 2017, when it placed the country on review for a downgrade. South Africa managed to keep its Baa3 rating and was rewarded with an outlook change to stable from negative when the review was completed.<\/p>\n
While the state of public finances had since deteriorated owing to ongoing support for Eskom and other state-owned companies, Moody\u2019s missed two of its last three scheduled rating actions. Had the company issued a warning earlier, it may have helped Mboweni in negotiating with labor groups, said Lullu Krugel, chief economist at PwC.<\/p>\n
While Cyril Ramaphosa\u2019s rise to power — first as leader of the ruling African National Congress and as then president of of the country — and reform agenda helped avert downgrade the first time around, his government\u2019s inability to push through reforms threatens to do the opposite.<\/p>\n
\u201cIf he doesn\u2019t use these three months wisely, we\u2019re facing another failed African country,\u201d said Lumkile Mondi, an economics lecturer at the University of the Witwatersrand in Johannesburg.<\/p>\n