The African Peer Review Mechanism (APRM) has criticised the downgrading of South Africa by rating agencies Fitch and Moody’s as “premature”, suggesting that the agencies have been unfair to South Africa.
In a statement released on Monday, APRM, a specialised entity of the African Union (AU), said while the rating actions had been justified by the two agencies, it also raised a number of key observations.
The entity noted that the double rating downgrades immediately translated to high debt costs, making government debt unsustainable, deteriorating asset values and reducing in disposable income for many.
According to APRM, this rating exacerbated the deterioration of South Africa’s fiscal position, undermining the government’s fiscal consolidation efforts. This was the second time such ratings downgrade had happened since the beginning of the Covid-19 pandemic.
“These risk factors have not significantly changed since the rating agencies had already acted on them with previous rating actions during the Covid-19 peak period. It would therefore have been prudent for the two rating agencies to grant the SA government reprieve to implement it’s recently delivered medium-term budget policy, which seeks to pursue fundamental reforms to stimulate economic growth, reduce spending, narrow the deficit and bring down the debt-growth trajectory,” APRM said.
The entity lamented that it was premature to assess the outcomes of the proposed fiscal consolidation plans, saying the downgrades could have waited to see whether the government was committed to fiscal consolidation through, for instance, assessment of the outcomes of the ongoing public sector wage negotiations.
APRM lamented that the timing of the rating downgrades during the pandemic crisis continued to raise question on the pro-cyclical approach of rating agencies – when bad news is piled onto bad news – putting a further strain on an economy that was already strained by the impact of Covid-19.
It argued that the South African Reserve Bank (SARB) forecasted the economy could expand by an annualised 45.2% in the third quarter, the biggest quarterly increase in at least 30 years.
The rating agencies, APRM said, also acknowledged that the country’s economy was beginning to rebound in the third quarter and that SA’s rating strengths remained in its 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.
“These factors should have been sufficient for the rating agencies to leave SA’s rating unchanged at one level below investment grade,” APRM said.
Based on these factors, the APRM said it would provide technical and operational support to SA’s credit rating liaison team in preparing for upcoming credit rating review.
It would also provide technical support to the National Treasury for implementation of admissible rating recommendations and engage rating agencies on information exchange with aim of avoiding further downgrades.