South Africa sunk deeper into junk territory last week after Moody\u2019s Investors Service joined Fitch Ratings in lowering the country\u2019s credit ratings.<\/p>\n
Moody\u2019s downgraded both ratings to Baa2 and maintained a negative outlook due to a further expected weakening in SA\u2019s fiscal strength.<\/p>\n
Fitch downgraded both ratings to BB- and maintained a negative outlook to reflect high and rising debt, very low trend growth and extreme inequality.<\/p>\n
Standard and Poor\u2019s Global Ratings (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
Reasons for rating decision:<\/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\u2019s 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 \u201cThe social compact agreed to between government, business, labour and civil society prioritises short-term measures to support the economy, alongside crucial structural economic reforms.\u201d<\/p>\n Simply put, the macro research team at Momentum Investments said that the negative outlook is reflective of larger-than-forecasted deterioration in debt burden and debt affordability, while the chances of\u00a0 additional financial demands from State owned businesses remains high, as is the potential for higher interest rates.<\/p>\n Moody\u2019s and Fitch\u2019s forecasts:<\/strong><\/p>\n Momentum Investments said that triggers for further negative ratings action include:<\/strong><\/p>\n Momentum Investments said that a rating upgrade is unlikely in the near future given the negative outlook by Moody\u2019s and Fitch. However, triggers for positive ratings action include:<\/strong><\/p>\n What does this mean for SA?<\/strong><\/p>\n Sanisha Packirisamy, an economist at Momentum Investments, said that the downgrade will also have the following implications:<\/p>\n Further Fitch warning<\/strong><\/p>\n Fitch Ratings said Monday that South Africa may struggle to stick to a plan to rein in government spending by freezing public-sector wages.<\/p>\n Finance minister Tito Mboweni has outlined a plan to pare the government salary bill, which has surged 51% since 2008, as part of an effort to start bringing its debt trajectory down after 2026.<\/p>\n Still, the government hasn\u2019t had a good track record in maintaining a lid on public spending during the past decade, according to Jan Friederich, Fitch\u2019s senior director, sovereign ratings.<\/p>\n South Africa faces the twin challenge of lower growth and rising debt levels, Friederich said on Bloomberg TV. A plan to improve government finances through a public wage freeze, may come unstuck, he said.<\/p>\n \u201cIf you look back the past decade, there have always been overruns in wage negotiations even when the offer from the government was quite a bit more generous than inflation,\u201d Friederich said. \u201cNow a wage freeze in an environment where there is still some inflation is quite a drastic measure. A lot of the savings depend on it and its highly uncertain.\u201d<\/p>\n Without state salary cuts, it leaves the government with very little wiggle room, with the central bank unlikely to reduce interest rates any further in the cycle.<\/p>\n The government\u2019s debt projections for the coming years are also deteriorating and should it opt to raise spending to boost growth, that may \u201cexacerbate\u201d the debt challenges, Friederich said.<\/p>\n \u201cThe government debt projections for the coming years are much higher than they were, say in spring, and they rely very heavily on the wage negotiations next year,\u201d he said.<\/p>\n
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