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South Africa fell deeper into junk territory after Moody’s Investors Service joined Fitch Ratings in lowering the country’s credit ratings on Friday.
Moody’s cut the local and foreign currency ratings to Ba2, two notches below investment grade, from Ba1. The outlook remains negative.
Fitch cut the local and foreign currency ratings to BB-, three notches below investment grade, from BB, also with a negative outlook.
“The key factor behind the downgrade to Ba2 is the further expected weakening of South Africa’s fiscal strength in the medium term,” Moody’s said in a statement.
Fitch said in a separate statement that “the pandemic has severely affected the performance of South Africa’s economic growth, and GDP is expected to remain below 2019 levels even into 2022.”
Only five of the 23 economists surveyed by Bloomberg predicted that Moody’s would downgrade the rating.
The coronavirus pandemic exacerbated the deterioration of South Africa’s government finances because it weighed on revenue collection, raised the cost of borrowing and pushed the economy into its longest recession in nearly three decades.
Government wages
Last month, Finance Minister Tito Mboweni’s medium-term budget showed plans to cut the government’s wage bill, which has risen 51% since 2008, as part of an effort to start reducing the debt trajectory. public after 2026.
The proposed wage freeze runs the risk of a backlash from politically influential labor groups already in a legal battle with the government to comply with an agreed wage deal.
If state wages cannot be cut, there is limited scope to offset measures in other spending areas.
“A recovery is looming, as the lockdown gradually eased during the third quarter and we expect GDP to contract 7.3% in 2020,” Fitch said.
The affordability of South Africa’s public debt, measured as the share of income needed to cover interest payments, will deteriorate to 25% in the medium term, according to Moody’s.
On Friday, S&P maintained its assessment of South Africa’s foreign currency debt three notches below investment grade, with a stable outlook.
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