Moody’s Investors Service has cut SA’s growth outlook for 2020, saying the economy will contract 2.5% this year as government steps to contain the effect of the Covid-19 pandemic will prove to be insufficient.
“The size of the support is very modest for now and will have limited effect in mitigating the impact of the crisis,” said the ratings agency. While SA may announce additional measures, the country has “limited capacity to stimulate the economy given the already strained fiscal situation”.
The government has so far taken minimal fiscal steps to support the economy relative to the stimulus seen in developed economies. It has so far announced about R15bn in tax relief, while the Industrial Development Corporation (IDC) has a R3bn programme.
The Unemployment Insurance Fund (UIF) has about R40bn available although there is concern that it doesn't have the operational efficiency to roll out the expected demand for Covid-19 lay-off benefits.
Moody’s downgraded SA to sub-investment grade on March 27, sparking the latest round of market volatility that pushed the rand and bonds to record lows. That move pushed SA into junk with all three major ratings agencies, raising concern of accelerated outflows at a time when a worldwide global slump is already causing investors to withdraw from emerging markets.
Sentiment towards SA assets was further dented as the country embarked on a 21-day lockdown, which has since been extended to the end of April, to fight the spread of the coronavirus, leaving economists scrambling to revise their already gloomy growth forecasts. The Reserve Bank cut interest rates by a percentage point on Tuesday, the second such move in less than a month.
The rand has dropped about 7% since the Moody’s downgrade. It extended those losses to record lows above R19/$ after Fitch Ratings announced its own downgrade a week later, pushing the country two rungs into junk.
Concern about government’s ability to fund its ballooning deficit pushed 10-year bond yields above 12%, with tightening liquidity positions prompting the central bank to buy bonds in the secondary market.
The currency extended its losses on Wednesday and was down 2.3% at R18.7427 by 6.20pm, as markets globally were dragged lower on lingering concern about the economic effect of the virus and results from major US banks indicating a jump in bad loans is on the way. The yield on the R2030 bond, which moves inversely to the price, rose 13 basis points to 10.60%.
Moody’s forecast for 2020 is still optimistic compared to those of the Reserve Bank and the International Monetary Fund (IMF), which see the economy contracting by 6.1% and 5.8%, respectively.
“As well as the near-term challenge of the coronavirus outbreak, weak confidence and labour market dynamics, combined with an unreliable electricity supply, will weigh on growth in 2020,” Moody’s said, adding that as a relatively open economy, SA will be hurt by weaker global demand.
Moody’s said it expects SA’s budget deficit to climb to a record 8.5% of GDP in 2020, with the debt as a percentage of GDP set to rise 22 percentage points over the next four fiscal years.
The agency said it would consider changing its negative outlook to stable “if the government consolidated its finances in line with our baseline expectations, growth picked up slowly but durably, and financing risks remained limited”.
In such a scenario, it would see an increasing assurance that primary deficits, excluding interest payments, would narrow, and debt stabilise below 90% of GDP. The company said in March that it expected the ratio to to reach 91%, including guarantees for state-owned enterprises, by the 2023 fiscal year, from 69% at the end of 2019.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.