SA’s financial markets, hit by dislocations that prompted Reserve Bank intervention, could have a shaky start on Monday after Moody’s Investors Service stripped the country of its last remaining investment-grade rating.
In his initial reaction, finance minister Tito Mboweni said on Friday that the Moody’s action "will further add to the prevailing financial market stress".
The rand, which fell 1.7% before the Moody’s decision, may trade weaker than R18/$ for the first time, according to Peregrine Treasury Solutions.
Analysts said long-term prospects were less clear.
With Moody’s maintaining a negative outlook, indicating that downgrades could be in store as a result of weak growth and a worsening debt burden, the action leaves SA’s government to navigate tumultuous months ahead as it seeks to deal with an economic contraction that is likely to add to the country’s near-30% unemployment rate.
SA’s ability to entice buyers for its debt faces an early test on Tuesday when the National Treasury auctions about R4.5bn of bonds in an environment in which sellers are struggling to find buyers. Foreign investors, who hold about 37%, sold a net R48bn of SA bonds in 2020 so far. The downgrade means the country may be saddled with higher borrowing costs, constraining its ability to spend on key social services such as health and education.
On Friday, Moody’s downgraded the country’s long-term foreign- and local-currency debt ratings to Ba1 from Baa3, citing SA’s deteriorating fiscal strength and structurally "very weak growth". The agency said progress on structural reform and efforts to stabilise electricity supply had been limited.
The "unprecedented" effect of the virus’s global spread would worsen SA’s economic and fiscal challenge.
Moody’s decision left SA in a "scary" position, said Johann Els, chief economist at Old Mutual Investment Group, who expects the economy to shrink 3.5% in 2020 and shed more than a million jobs. At the height of the global financial crisis, in 2009, SA’s GDP fell 1.5% and the economy lost 860,000 jobs.
Though some analysts believed markets had priced in the downgrade, it came at a time of extreme volatility, which increased liquidity pressures with local and international investors having fled to safe-haven assets. SA 10-year yields, which move inversely to the price, surged to new records last week. The R2030 was at 11.65% on Friday, having reached 12.38% on March 24. It has risen from a 2020 low of 8.68%. The rand was at R17.62/$, down a fifth in 2020.
SA’s downgrade will mean an eventual exit from global bond indices such as the FTSE Russell World Government Bond Index, which is tracked by global institutional investors.
The downgrade will exacerbate the weakening in the rand that has followed the crisis and poses a risk for the government’s funding programme, Tshepiso Moahloli, the acting head for asset and liability management in the Treasury, said on Sunday during a briefing with Mboweni and Bank governor Lesetja Kganyago.
Potential outflows could range between $5bn (R88bn) and $12bn, based on estimates from various sources, she said.
The picture is complicated by FTSE Russell’s delay in rebalancing the index until the end of April. That means passive funds do not have to rearrange their holdings, which would have meant forced sales of SA bonds.
The delay will leave the local bond market "in a period of severe uncertainty as to the timing of actual flows", said Citadel chief investment officer George Herman.
"Markets will attempt to price this fundamental change, which means that in the short term both the rand and SA bond yields will come under pressure."
The downgrade was followed on Saturday by proposals from the Reserve Bank to help ease liquidity pressures and to make it easier for the country’s banks to provide relief to customers affected by the crisis.
The proposed directives include lowering the level of liquid assets that a bank must maintain to cover it during a crisis period, known as the liquidity coverage ratio (LCR).
The steps were aligned with what regulators are doing internationally, said Mike Brown, chair of the Banking Association SA and Nedbank CEO. The proposed LCR reduction would enable banks to use the liquidity that was now in the banking system for increased use in the real economy, said Brown.
The restructured credit exposures would ensure that banks could help clients affected by Covid-19 without penalties in regulatory capital, he said.
"Taken together, they show proactive use by the [Reserve Bank] of macro prudential regulation to support the real economy," said Brown.
The steps to enable banks to give their customers debt relief would provide a significant stimulus to the economy and still leave the Bank with room to cut interest rates, said Gina Schoeman, SA economist at Citi.
According to Citi’s estimates, a three-month payment holiday on 10% of all consumer debt — such as mortgages, vehicle loans and credit cards — would put an estimated R14bn back into the economy. A three-month payment holiday on all consumer debt could inject R140bn.
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