Govt says Moody’s downgrade could ‘not have come at a worse time’

The decision by Moody’s to cut South Africa’s credit rating to junk could “not have come at a worse time” for South Africa, National Treasury has said, as the country enters a 21-day lockdown period in an effort to slow the spread of the coronavirus. 

In its rating action on Friday evening Moody’s cited a deterioration in SA’s fiscal strength and “structurally very weak growth” for its decision to lower the country’s rating to Ba1 from Baa3. The outlook remains negative. It now estimates that SA’s debt burden will reach 91{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of GDP in the 2023 fiscal year. 

Ahead of Friday evening’s decision, Moody’s was the sole major rating agency to not already have cut SA’s credit rating to junk. Fitch and S&P both downgraded SA to subinvestment grade in 2017.

Treasury, in a statement, said the downgrade would add to the prevailing financial market stress as the country battles to contain the spread of the coronavirus. 

Because of the downgrade, South African government bonds will automatically be excluded from the major FTSE World Government Bond Index. Treasury noted that the government bond market will experience further capital outflows as fund managers with investment grade mandates will be forced to sell South African government bonds.

“Non-residents currently hold approximately 37{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} (R800 billion) of the total domestic government bonds and the number is expected to substantially decline with the combined impact of Covid-19 and the downgrade. The interest rate for government, households and the broader economy is also expected to increase as a result,” it said. 

“While some market participants argue that the impact of a sovereign downgrade has already been priced in, it is difficult to stipulate with certainty the extent.”

‘Trembling in our boots’

“Therefore, to say we are not concerned and trembling in our boots about what might be in the coming weeks and months is an understatement,” Finance Minister Tito Mboweni in a statement on Friday evening. 

He added that in the “immediate period” South Africans were rallying together to fight Covid-19 and ensure South Africa emerges triumphant from the pandemic”.

“Over the short to medium term, government remains committed to implementing structural economic reforms to address the weak economic growth, constrained fiscus and the ailing state-owned companies,” he added.

Moody’s, however, said that progress on structural reforms had been limited, and no initiatives that constitute a “step-change” for the economy had progressed. The agency also said that the restoration of full capacity to SA’s electricity system will take “some years to complete,” which also contributed to its decision.  

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