SA was sunk deeper into junk status on Friday, receiving a double bill of ratings downgrades from both Moody’s Investors Service and Fitch Ratings.
Within a few minutes of the decisions, the rand moved from being 0.5% firmer on the day to 0.18% weaker at R15.4253/$.
Both agencies maintained their negative outlook, with Moody’s now placing SA at two notches into junk, and Fitch moving SA three notches below investment grade.
In response to the decisions finance minister Tito Mboweni said the decision to downgrade the country further “is a painful one”.
He said the move would not only have “immediate implications for our borrowing costs, it will also constrain our fiscal framework”.
“There is, therefore, an urgent need for the government and its social partners to work together to ensure that we keep the sanctity of the fiscal framework and implement much-needed structural economic reforms to avoid further harm to our sovereign rating.”
The Treasury implored all South Africans to play their part by adhering to the necessary health and safety protocols to avoid a second wave of Covid-19 infections, “which would have significant adverse implications for the economy and plans to boost employment”.
Moody’s said the driver behind its downgrade is the further expected weakening in SA’s fiscal strength over the medium term, warning that its capacity to mitigate the shock of the Covid-19 pandemic is lower than that of many sovereigns “given significant fiscal, economic and social constraints and rising borrowing costs”.
“In recent years, the government's strategy has rested on structural reforms to promote medium-term growth as well as on fiscal consolidation. However, while the strategy remains in place, implementation risks have risen materially,” Moody’s said.
The downgrades are yet another blow for SA, after the country lost its last remaining investment-grade rating when Moody’s cut SA to junk status in late March, just as it went into a hard lockdown to prevent the spread of the coronavirus.
Though restrictions have gradually been lifted, SA is still reeling from the Covid-19 shock, which is expected to push the country into its deepest recession since the Great Depression.
Friday’s reviews follow a bleak medium-term budget policy statement (MTBPS) presented by Mboweni in October, which reflected the damage wrought on SA’s already weak finances.
Mboweni outlined a slower, high-stakes path to fiscal consolidation and debt stabilisation that hinges on deep spending cuts — largely from the public sector wage bill — as well as plans to deliver on long-promised economic reforms to boost growth.
Labour unions — which are vehemently opposed to this plan — are already fighting the state in court after it failed to implement this year’s wage increases agreed to in the last wage deal in 2018.
The state’s consolidated budget deficit will widen to almost 16% of GDP this year, while its debt levels are set to peak at 95.3% of GDP by 2025/2026 according to the Treasury. Moody’s, however, projects government debt to GDP will rise to 110% by the end of the 2024 fiscal year — when guarantees to state-owned entities (SOEs) are included.
Moody’s said it maintained its negative outlook given the risks “that the debt burden and debt affordability could deteriorate significantly more” than its projections.
The downgrades are likely to place further stress on government finances — making its debt more expensive. Debt service costs are the fastest-growing spending item in the budget, increasing by an average 16.1% a year in the coming three years, and rapidly crowding out spending in most other areas, according to the Treasury.
Moody’s also warned that economic and social constraints to the government’s growth strategy have intensified. The country’s income inequalities, already among the highest globally prior to the crisis, are likely to intensify, which in turn will hinder reform implementation and weigh on growth, Moody’s said.
Fitch meanwhile said its downgrade and negative outlook reflected rising government debt, “exacerbated by the economic shock triggered by the pandemic. SA’s low trend growth and high inequality will continue to complicate fiscal consolidation efforts”.
Fitch was sceptical of the government’s economic reconstruction and recovery plan (ERRP), launched in October in a bid to reignite growth. “The track record of implementation of earlier reform initiatives has been relatively weak and, even if implemented, the effect of the reforms would be limited and take time to accumulate.”
“The challenging fiscal context will also complicate some of the initiatives and will weigh on growth over the medium term,” it warned.
Fitch also questioned the state’s fiscal consolidation efforts, arguing these were subject to “considerable risks”, most notably from its reliance on savings on its wage bill.
The freeze on wages was unlikely to be achieved as wage negotiations over the past decade inevitably led to above-budgeted settlements, said Fitch.
Local elections and the ANC’s upcoming National General Council will further complicate wage negotiations, it said.
S&P Global was the only major ratings agency to give SA a reprieve on Friday when it maintained both its rating and outlook. The agency has SA’s long-term foreign currency rating three rungs below investment grade, with a stable outlook.
“The outlook on both the foreign- and local-currency ratings is stable, since SA’s credit strengths, particularly a credible central bank, a flexible exchange rate, actively traded currency, and deep capital markets, should help counterbalance low economic growth and fiscal pressures,” S&P said.
S&P made an unscheduled downgrade of SA in April just after the country went into it a hard lockdown. At the time, it cited the effect of the Covid-19 pandemic on the economy and heightened concerns about the long-term sustainability of the country’s debt.
Note: This story has been updated, adding the Treasury comment and that of finance minister Tito Mboweni.
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