After South Africa’s sovereign credit rating was downgraded to subinvestment grade, or “junk status”, by Moody’s – the last ratings agency to do so – on Friday, government reacted with dismay.
Fitch and S&P downgraded SA to junk in 2017 already.
Moody’s cited in a statement the deterioration in SA’s fiscal strength and “structurally very weak growth” as reasons for lowering the rating to Ba1 from Baa3. The outlook remained negative.
Reacting to the news on Saturday, government noted the decision by Moody’s to downgrade South Africa’s long-term foreign and local currency debt ratings to ‘Ba1’ from ‘Baa3’. South Africa’s credit ratings by Moody’s are now one notch below investment grade.
According to Moody’s, the key drivers were structurally very weak growth and constrained capacity to stimulate the economy, and an inexorable rise in government debt over the medium term.
The negative outlook reflected the risk that economic growth would prove even weaker and the debt burden would rise even faster and further than currently expected, weakening debt affordability and potentially access to funding.
“The decision by Moody’s could not have come at a worse time,” said Treasury. “South Africa, like many other countries, is seized with containing the outbreak of the coronavirus. 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.
“The sovereign downgrade will further add to the prevailing financial market stress. These two events will truly test South African financial markets. South Africa’s deep, stable financial sector and robust macroeconomic policy framework have always been flagged as a credit strength, including the South African Reserve Bank’s demonstration of a good track record in implementing credible and effective monetary policy and preserving financial stability.
“The sovereign downgrade will further see South Africa being excluded from the FTSE World Government Bond Index (WGBI) and the government bond market will experience further capital outflows as fund managers with investment grade mandates will be forced to sell South African government bonds. Non-residents currently hold approximately 37% (R800 billion) of the total domestic government bonds and the number is expected to substantially decline with the combined impact of Covid-19 and the downgrade. The interest rate for government, households and the broader economy is also expected to increase as a result. 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.”
Finance Minister Tito Mboweni said: “To say we are not concerned and trembling in our boots about what might be in the coming weeks and months is an understatement.”
We shall overcome!
— Tito Mboweni (@tito_mboweni) March 27, 2020
Government said it remained committed over the short to medium term to implementing structural economic reforms to address the weak economic growth, constrained fiscus and ailing state-owned companies.
The state is providing medium-term support to Eskom to secure energy supply and to honour the state’s contractual obligations. National Treasury, in partnership with the Department of Public Enterprises, is instituting a series of measures to stabilise finances at the various state-owned companies. The sustainability of government finances remains important and critical to attain and maintain, not only for credit ratings’ sake, but more importantly for the sake of South Africans.
Mboweni added: “It 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. 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.”
(Compiled by Carina Koen and Charles Cilliers)