Moody’s Investors Service says SA’s rating is “increasingly constrained” by its worsening fiscal position and weak economy.
The ratings company, which, in March, became the last of the top three to move SA into non-investment grade, gave a generally gloomy assessment of the country’s prospects. It has SA one level below investment grade with a negative outlook, meaning the next move is more likely to be down than up.
“Progress on structural economic reforms has been very limited amid social and political obstacles” and this has seen the country fail to stabilise its debt, so that “interest payments are consuming an increasing share of the budget, reducing fiscal space”, the agency said in its latest credit opinion published on Thursday.
The note came just more than two weeks after the agency expressed scepticism that finance minister Tito Mboweni would be able to achieve the required cost savings to stabilise the debt-to-GDP ratio at a still historically high 87.4% by 2023/2024. The Treasury’s projections show the rate shooting up to exceed 100% of GDP without the spending cuts, which are strongly opposed by the ANC’s trade union allies.
With the government facing a revenue shortfall of about R300bn for the current fiscal year, some analysts have questioned whether the bond market will be able to absorb the increasing supply, putting in danger what has been one of SA’s key strengths so far — its ability to fund itself via capital markets in its own currency.
On the other hand it has also faced pressure to jettison the budget and boost spending further. Economic reforms proposed by the Treasury to boost growth have also faced resistance.
“The government’s capacity to rely on domestic, local currency funding thanks to a deep financial sector is a key credit support,” Moody’s said. It also cited the country’s “resilient” banks and the relatively low share of foreign-denominated debt among its key strengths.
Writing in Business Day earlier this week, Reserve Bank deputy governor Kuben Naidoo warned that failure to chart a clear and credible path to reducing its deficit would hurt its access to capital markets and boost its borrowing costs, meaning more resources will be diverted away from key services towards paying bondholders.
Given its negative outlook, Moody’s said it is unlikely that SA will get an upgrade in the near future. It would likely downgrade the country further if “we concluded that growth will remain very weak and the primary deficit wide and/or if financing costs were to rise significantly”.
Moody’s expects the country’s GDP to shrink 6.5% in 2020, less pessimistic than the projections from the Treasury and the Reserve Bank, which expect a drop of about 7%.
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