South Africa sunk deeper into junk territory on Friday (20 November) after Moody\u2019s Investors Service joined Fitch Ratings in lowering the country\u2019s credit ratings.<\/p>\n
Moody\u2019s cut the nation\u2019s foreign and local-currency ratings to Ba2, two levels below investment grade, from Ba1, Bloomberg reported. The outlook remains negative.<\/p>\n
Fitch cut the nation\u2019s foreign and local-currency ratings to BB-, three levels below investment grade, from BB, also with a negative outlook.<\/p>\n
S&P on Friday kept its assessment of South Africa\u2019s foreign-currency debt three levels below investment grade, with a stable outlook.<\/p>\n
Government has noted the credit rating decisions made by the rating agencies.<\/p>\n
“The decision by Fitch and Moody\u2019s to downgrade the country further is a painful one. The downgrade will not only have immediate implications for our borrowing costs, it will also constrain our fiscal framework,” said minister of finance, Tito Mboweni in a statement on Saturday (21 November).<\/p>\n
“There is, therefore, an urgent need for government and its social partners to work together to ensure that we keep the sanctity of the fiscal framework and implement much-needed structural economic reforms to avoid further harm to our sovereign rating.”<\/p>\n
S&P affirmed South Africa\u2019s long term foreign and local currency debt ratings at \u2018BB-\u2019 and \u2018BB\u2019, respectively. The agency maintained a stable outlook.<\/p>\n
According to S&P<\/strong>, lockdowns associated with combating the Covid-19 pandemic plunged South Africa into its sharpest quarterly economic contraction in the second quarter of 2020, leading to a large widening of the fiscal deficit and rapidly rising government debt.<\/p>\n Nevertheless, there are indications that the economy is beginning to rebound in the third quarter.<\/p>\n Fitch downgraded South Africa\u2019s long term foreign and local currency debt ratings to \u2018BB-\u2019 from \u2018BB\u2019. The agency maintained a negative outlook.<\/p>\n According to Fitch<\/strong>, both the downgrade and negative outlook reflect high and rising government debt exacerbated by the economic shock triggered by the Covid-19 pandemic.<\/p>\n Further, the country’s very low trend growth and exceptionally high inequality will continue to complicate fiscal consolidation efforts, it said.<\/p>\n Moody\u2019s downgraded South Africa\u2019s long term foreign and local currency debt ratings to \u2018Ba2\u2019 from \u2018Ba1\u2019. The agency maintained a negative outlook.<\/p>\n According to Moody\u2019s<\/strong>, the downgrade reflects the impact of the pandemic shock, both directly on the debt burden and indirectly by intensifying the country\u2019s economic challenges and the social obstacles to reforms.<\/p>\n Furthermore, South Africa\u2019s capacity to mitigate the shock over the medium term is lower than that of many sovereigns given significant fiscal, economic and social constraints and rising borrowing costs.<\/p>\n Government\u2019s policy priorities remain economic recovery and fiscal consolidation, as outlined in president Cyril Ramaphosa\u2019s Economic Reconstruction and Recovery plan and the Medium-Term Budget Policy Statement released in October, Treasury said.<\/p>\n “The social compact agreed to between government, business, labour and civil society prioritises short-term measures to support the economy, alongside crucial structural economic reforms.”<\/p>\n Treasury looking for positives<\/strong><\/p>\n Treasury further noted that rating agencies have indicated that South Africa\u2019s rating strengths include a credible central bank, a flexible exchange rate, an actively traded currency, and deep capital markets, which should help counterbalance low economic growth and fiscal pressures.<\/p>\n “Government implores on all members of society to adhere to all the necessary health and safety protocols to avoid a second wave of Covid-19 infections which would have significant adverse implications for the economy and plans to boost employment.”<\/p>\n Sub-investment grade implications \u2013 what it means for the average South African<\/strong><\/p>\n Treasury said that the Covid-19 pandemic shock hit South Africa at a difficult time. Recent downgrades saw South Africa reaching its lowest credit rating levels from the \u2018big three\u2019 rating agencies since 1994.<\/p>\n “Economic growth has continued to decline irrespective of the attempts to reduce structural constraints.<\/p>\n “Financial strain to the government caused by the pandemic, weak economic growth, high wage bill as well as continuous support to the financially weak state-owned companies have weakened public finances and led to government accumulating debt.”<\/p>\n The government has accumulated debt stock of nearly R4 trillion and spends approximately R226 billion on interest costs.<\/p>\n “If the cost of borrowing money for government increases, it means that government will have to either cut back on social spending or tax more the few people that are employed, which is bad for the country,” the state financial institution said.<\/p>\n Further downgrades will extend the impact of lockdown restrictions, it warned. “These restrictions led to many workers being laid off from work since companies were temporarily closing doors and cutting back on operational costs.<\/p>\n “Without any disposable income and increasing costs of goods, it will be difficult to maintain the standard of living.”<\/p>\n Continuous rating downgrades, Treasury said, will translate to unaffordable debt costs, deteriorating asset values (such as retirement, other savings and property) and reduction in disposable income for many.<\/p>\n “Rating downgrades associated with Covid-19 have also resulted in many small businesses closing down and laying off a number of workers.<\/p>\n “Operational costs together with borrowing costs are expected to increase, supporting the motive to pass through the costs to consumers or further laying off workers,” it said.<\/p>\n The recent rating outcomes mean that South Africa needs to fast track growth-enhancing strategies to rectify the accumulation of debt and minimize the costs associated with negative sentiments.<\/p>\n “Operation Vulindlela is a key initiative in this regard and demonstrates government\u2019s commitment to fast-tracking the implementation of critical reforms that raise economic growth and improve fiscal sustainability,” Treasury said.<\/p>\n Mboweni\u2019s medium-term budget last month showed plans to pare the government salary bill, which has surged 51% since 2008, as part of an effort to start bringing the government debt trajectory down after 2026, Bloomberg reported.<\/p>\n The proposed wage freeze risks a backlash from politically influential labour groups that are already in a legal battle with the government to honour an agreed pay deal.<\/p>\n If state salaries can\u2019t be cut, there\u2019s limited room for offsetting measures in other expenditure areas, Bloomberg said.<\/p>\n Sanisha Packirisamy, an economist at Momentum Investments, said that the downgrade will also have the following implications:<\/p>\n By definition, the rating downgrades further into junk status imply that holders of South Africa’s sovereign debt should include a higher risk premium in the valuation of the asset class to reflect a higher future risk of default, said Packirisamy.<\/p>\n “However, international precedent has shown that ratings downgrades within the non-investment grade bracket is less consequential for sovereign yield levels than a downgrade from investment grade status to junk.”<\/span><\/p>\n This is because the latter move could have mandate implications for bondholders and hence trigger forced selling<\/span>,<\/span> as such, the country\u2019s exclusion from global bond indices after it was downgraded into junk status by Moody\u2019s in March this year was of more importance to yields, Packirisamy said.
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