Ratings firm Moody’s has downgraded South Africa’s credit rating to below investment grade, after three years being the only major firm to keep the country’s head above water.<\/p>\n
Moody\u2019s downgraded South Africa\u2019s long term foreign and local currency debt ratings to \u2018Ba1\u2019 from \u2018Baa3\u2019 with a negative outlook.<\/p>\n
The move did not come as a big shock to investors and analysts, who have been questioning Moody’s positioning on South Africa over the years, following Fitch and S&P Global’s moves to junk the economy in 2017.<\/p>\n
But even though the downgrade is not much of a surprise, its timing – in the middle of a global coronavirus pandemic where South Africa has just locked down most of the economy for 21 days – has left the country in a considerably weaker position.<\/p>\n
And it’s one that the country will likely be unable to reverse in the near, or even medium term, according to Intellidex analyst, Peter Attard Montalto.<\/p>\n
According to Moody’s the downgrade comes as South Africa is beaten down by unreliable electricity supply, with persistently weak business environment and low levels of investment.<\/p>\n
The country also has a long-standing labour issue, and low levels of flexibility on policy. Effectively, South Africa has a lot of problems, and government isn’t (and can’t) move quickly enough to solve them.<\/p>\n
While the coronavirus pandemic is mentioned in the report, the crux of the rating downgrade lies in the country’s other fundamentals.<\/p>\n
The rand will likely weaken further when markets open on Monday, and is expected to hit over R18.00\/$ in the short-term.<\/p>\n
Government noted the decision by Moody\u2019s to downgrade South Africa\u2019s long term foreign and local currency debt ratings a notch below investment grade.<\/p>\n
“The decision by Moody\u2019s could not have come at a worse time. South Africa, like many other countries, is seized with containing the outbreak of the coronavirus (Covid-19), said Treasury.<\/p>\n
“The impact of Covid-19 is felt across various sectors of the economy including the financial markets which experienced a significant sell-off in equities, bonds and exchange rates as investors retreated to safe haven securities amid the uncertainty.<\/p>\n
The sovereign downgrade will further add to the prevailing financial market stress. These two events will truly test South African financial markets, it said.<\/p>\n
“South Africa\u2019s deep, stable financial sector and robust macroeconomic policy framework have always been flagged as a credit strength, including the South African Reserve Bank\u2019s demonstration of a good track record in implementing credible and effective monetary policy and preserving financial stability.”<\/p>\n
Treasury said that the interest rate for government, households and the broader economy is expected to increase. “While some market participants argue that the impact of a sovereign downgrade has already been priced in, it is difficult to stipulate with certainty the extent.”<\/p>\n
\u201cTherefore, to say we are not concerned and trembling in our boots about what might be in the coming weeks and months is an understatement,\u201d said minister of finance, Tito Mboweni.<\/p>\n
\u201cIt is with a heavy heart to note that all three major credit ratings agencies currently rate South Africa at sub-investment grade. However, every crisis presents an opportunity. The opportunity we have today is to unite and work together to address our challenges.<\/p>\n
“We as a people have overcome insurmountable challenges in the past and we can still overcome. We shall rise. We have to rise. We owe it to ourselves,\u201d Mboweni said.<\/p>\n
What happens next?<\/strong><\/p>\n Following the rating to full junk, South Africa will gradually see a loss in foreign direct investment, as it loses its place in the World Government Bond Index, which will likely happen at the end of April.<\/p>\n This will see around $5 billion (R88 billion) pulled out of the economy.<\/p>\n But that’s not the end of South Africa’s woes, Attard Montalto said, as he expects more ratings downgrades will come as government struggles to regain credibility.<\/p>\n In its report, Moody’s mentions that there is “even greater uncertainty regarding eventual stabilisation, in turn threatening South Africa’s access to funding at manageable costs\u201d a scenario which is likely to stick, the analyst said.<\/p>\n Important indicators in this regard include the government’s ability over the next year or so to:<\/p>\n The analyst said that government is likely to fail or make little progress in any of these – particularly on the energy front.<\/p>\n “As a result of these factors, and our views on them, we forecast Moody\u2019s will cut again in the next year. We also forecast that S&P and Fitch may both downgrade in the coming months on the coronavirus impact,” he said.<\/p>\n Can South Africa recover?<\/strong><\/p>\n There are no quick or easy fixes for South Africa – and even if there were, government remains hamstrung by policy inefficiency and factionalism within the ruling ANC, he noted.<\/p>\n “We see virtually zero probability that South Africa will regain investment grade status in the three year forecast horizon we look at,” Attard Montalto said.<\/p>\n National Treasury – led by Tito Mboweni – had put in place an economic policy document in 2019 which addressed all of Moody’s concerns. However, stalling, particularly on the energy front – which was specifically called out by Moody’s – has made much of this ineffective.<\/p>\n “National Treasury must move with speed to re-establish credibility,” Attard Montalto said.<\/p>\n He said an emergency budget at the end of April after lockdown – laying out transparently what is going on with growth, the revenue impact and the implications for the fiscal framework and issuance – is crucial to ensuring Treasury keeps decent access to market for issuance into a hugely challenging April-July as the coronavirus impact hits.<\/p>\n However, he noted that while Treasury is fully aware of the weight of the downgrade, there are many within government (and the ANC), who ‘don’t care’, and will see this as a positive move, “freeing them of the shackles” of the ratings agencies.<\/p>\n “Something fundamentally has to break first for the politics to shift to reform. Maybe the deep scars left by coronavirus on the economy and a permanent step up in unemployment and down in output will be that, maybe failed auctions or going to the IMF will be that,” he said.<\/p>\n “This point, however, remains hard to see and hard to forecast. So for now it is up to Treasury to redouble the good fight.”<\/p>\n\n
\n