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Finance Minister Tito Mboweni has described as “painful” the decisions of international rating agencies – Moody’s Investors Service and Fitch Ratings Agency – to further downgrade South Africa’s credit ratings to junk status.
In a statement released by the National Treasury on Saturday, Mboweni said the cut would not only have immediate implications for South Africa’s borrowing costs, but would also tighten the country’s fiscal framework.
Moody’s and Fitch downgraded South Africa’s credit ratings further to junk on Friday. The two credit rating agencies said the Covid-19 pandemic intensified South Africa’s fiscal challenges and exacerbated the upward trend in the country’s government debt burden.
The agencies noted that the pandemic struck after South Africa was already in a recession following two quarters of negative economic growth.
As a result, Moody’s downgraded South Africa’s foreign and local currency ratings to Ba2, two notches below investment grade, from Ba1. Fitch followed suit, downgrading the local and foreign currency ratings to BB-, three notches below investment grade, from BB.
Both agencies emphasized that the downgrades also come with a negative outlook.
While South Africa is not the only one severely affected by the crisis, its ability to mitigate the impact in the medium term is less than that of many sovereigns given significant fiscal, economic and social constraints and rising costs of the loans, ”Moody’s said.
Moody’s Investor Service
According to a statement from Moody’s, the key factor behind the downgrade to Ba2 was the expected further weakening of South Africa’s fiscal strength over the medium term.
The rating agency said that while the rating action earlier this year reflected an erosion in the country’s credit profile, Friday’s action reflected the rating agency’s assessment of the impact of the pandemic shock, both directly on the debt burden as indirectly by intensifying the country’s economic challenges. and social obstacles to reforms.
“While South Africa is not the only one that has been severely affected by the crisis, its ability to mitigate the impact in the medium term is less than that of many sovereigns given significant fiscal, economic and social constraints and rising costs. of loans, ”Moody’s said. .
The agency added that the government relied on structural reforms to promote growth in the medium term, as well as fiscal consolidation. However, although the strategy remained in place, the implementation risks had increased substantially.
Fitch’s downgrade and negative outlook also reflected high and rising public debt, exacerbated by the economic shock caused by the Covid-19 pandemic.
Fitch said South Africa’s economic growth and GDP are expected to remain below last year’s levels through 2022.
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He said the particularly tight lockdown in the second quarter, combined with the broader global and national consequences of the pandemic, led to a sharp drop in production.
Fitch said that while it acknowledged that South Africa’s economic recovery would improve after the lockdown eased during the third quarter, it still expected GDP to contract 7.3% this year.
“Due to base effects, growth will increase to 4.8% next year, but then it will slow to 2.5% in 2022.
“We believe trend growth will remain at around 1.5%, and there are risks that the long-lasting effects of the pandemic could further influence trend growth. Investment spending had already weakened in recent years, falling last year to its lowest level in real terms since 2012, reflecting challenges to the business environment such as poor power supply reliability, labor market inflexibility and prospects. moderate domestic demand, ”Fitch said.
Unlike Moody’s and Fitch, S&P Global Ratings confirmed South Africa’s long-term local and foreign currency debt ratings at BB- and BB, respectively. S&P maintained a stable outlook for the country. The agency said that despite the lockdowns associated with fighting the Covid-19 pandemic plunged South Africa into its sharpest quarterly economic contraction in the second quarter of this year, causing a large increase in the fiscal deficit and a rapid increase in public debt, “however, there are signs that the economy is beginning to rebound in the third quarter.”
Currently, the government has accumulated a debt stock of almost R4 trillion and spends around R226 billion on interest costs. Continued support for financially weak SOEs has weakened public finances and led the government to accumulate debt
Titus Mboweni
Responding to the country’s credit rating downgrades, Mboweni said there was an urgent need for the government and its social partners to work together to ensure that South Africa maintains the inviolability of the fiscal framework and implements much-needed structural economic reforms to avoid further damage. to the sovereign rating of the country.
City Press previously reported that the impact of the Covid-19 pandemic hit South Africa at a difficult time. Economic growth has continued to decline regardless of attempts to reduce structural constraints.
Financial pressure on the government was the result of the pandemic, weak economic growth, high public sector wage bill, and continued support for state-owned companies.
Mboweni said: “Currently, the government has accumulated a stock of debt of almost R4 trillion and spends around R226 billion on interest costs. Continued support for financially weak state-owned companies has weakened public finances and led the government to accumulate debt. “
The minister said that the recent downgrades caused South Africa to reach its lowest credit rating levels of the “big three” rating agencies since 1994. He added that continued downgrades would translate into unaffordable debt costs, deteriorating asset values such as retirement, other savings and property. and reduced disposable income for many.
“If the cost of borrowing money for the government increases, it means that the government will have to cut social spending or tax more of the few people who are employed, which is bad for the country.
“New downgrades will extend the impact of the closure restrictions.
“These restrictions led to many workers being laid off as companies were temporarily closing doors and reducing operating costs. Without disposable income and without rising costs of assets, it will be difficult to maintain the standard of living, ”said Mboweni.
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