Moody’s Investors Service flipped the switch late on Friday night, downgrading SA to junk status, coinciding with the country’s first full day of a three-week lockdown aimed at slowing the spread of the coronavirus.
The move was expected in the face of SA’s poor GDP growth performance and fragile fiscal position, even before the onset of the pandemic.
Moody’s dropped SA’s long term foreign and local currency ratings rating to Ba1, with the outlook remaining negative. This brings it in line with the subinvestment grade ratings from peer agencies, Fitch and S&P Global.
“The key driver behind the rating downgrade to Ba1 is the continuing deterioration in fiscal strength and structurally very weak growth, which Moody’s does not expect current policy settings to address effectively,” the agency said in a statement.
“The unprecedented deterioration in the global economic outlook caused by the rapid spread of the coronavirus outbreak will exacerbate SA’s economic and fiscal challenges and will complicate the emergence of effective policy responses,” Moody’s said.
On Friday SA announced its first death from Covid-19, which has hit economies around the world, disrupting trade, business activity and sent financial markets into a tailspin.
The shutdown is expected to shrink SA’s economy in 2020, and have a negative effect on the national budget.
Moody’s said that SA’s debt burden will rise over the next five years “under any plausible economic and fiscal scenario”, estimating that the debt burden will reach 91% of GDP by 2023, including the guarantees to state-owned enterprises — up from 69% at end of 2019. It is expecting the government deficit to widen to about 8.5% of GDP in 2020, higher than the National Treasury’s estimate of 6.8%.
Fiscal strains from interest payments and support to state-owned enterprises will continue, it added.
The negative outlook reflects “the risk that economic growth will prove even weaker and the debt burden will rise even faster and further than currently expected, weakening debt affordability and potentially, access to funding”, the agency said.
The downgrade will force SA from important global bond indices, tracked by global institutional investors, such as the FTSE World Government Bond Index.
Though the downgrade has been viewed by some analysts as priced in by markets, suggesting that capital outflows from SA could be limited, it comes as local financial markets have been taking strain due to the turmoil induced by the disease.
The SA Reserve Bank has been forced to take extraordinary steps in the past week to ease liquidity, including buying government bonds in the secondary market.
Responding to the decision finance minister Tito Mboweni said it “could not have come at a worse time”.
The effect of the virus is being felt across various sectors of the economy including the financial markets which experienced a significant sell-off in equities, bonds and the rand as investors retreated to safe-haven securities amid the uncertainty, he 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,” Mboweni said.
Non-residents currently hold approximately 37%, or R800bn, of the total domestic government bonds, according to the Treasury, and the number is expected “to substantially decline with the combined effect of Covid-19 and the downgrade”.
Ahead of the decision the rand recorded its biggest loss in more than a week. By 11pm on Friday it was 1.75% weaker at R17.62/$, its biggest drop since March 18. It is now down nearly 25% against the dollar in 2020.
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