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South Africa’s Finance Ministry said on Saturday that the downgrades of Moody’s and Fitch’s credit ratings would increase the country’s borrowing costs and restrict its fiscal options.
“The decision of Fitch and Moody’s … is painful,” said Tito Mboweni, finance minister, in a statement.
Read: SA descends deeper into trash after two markdowns
There is an urgent need for the government to implement structural economic reforms to avoid further damage to the country’s sovereign rating, he said.
Credit rating agencies Fitch and Moody’s downgraded South Africa’s sovereign ratings deeper into junk territory late on Friday due to rising debt and a possible further weakening of its fiscal position. S&P Global affirmed its rating.
With the Covid-19 pandemic worsening, South Africa’s tax revenues are falling as the economy contracts, while spending to contain the spread of the virus and cushion its impact on the poor has increased.
In last month’s midterm budget, the National Treasury forecast that South Africa would run a budget deficit of more than 15% of GDP in the fiscal year ending March 2021, the highest in post-apartheid history.
Africa’s most industrialized nation currently has a debt of almost 4 trillion rand, or 63.3% of GDP. Its debt-to-GDP ratio is expected to rise to more than 90% in three years, the worst such increase in the world.
With the ratings downgrading, the cost of borrowing and paying debt service will rise and the government will have to cut social spending or tax more, the National Treasury said, at a time when nearly a third of the population is unemployed.
“Continued downgrades will translate into unaffordable debt costs, asset impairment (such as retirement, other savings and property) and reduced disposable income for many,” he said, referring to the impact on South Africans.
Market reaction to the downgrades is likely to be moderate, said Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Bank.
“The (government) reform momentum looks more positive in the short term,” he said, but cautioned that it is fraught with challenges.
