What the latest downgrades mean for the average South African


South Africa sank deeper into trash territory on Friday, November 20 after Moody’s Investors Service joined Fitch Ratings in lowering the country’s credit ratings.

Moody’s downgraded the country’s foreign and local currency ratings to Ba2, two levels below the investment rating, of Ba1, Bloomberg reported. The outlook remains negative.

Fitch downgraded the country’s foreign and local currency ratings to BB-, three levels under the investment grade, from BB, also with a negative outlook.

On Friday, S&P kept its valuation of South Africa’s foreign currency debt at three levels below the investment grade, with the outlook stable.

The government has taken note of the credit rating decisions made by the rating agencies.

“The decision by Fitch and Moody’s to downgrade the country further is painful. The downgrade will not only have immediate implications on our borrowing costs, it will also constrain our budgetary framework, ”said Finance Minister Tito Mboweni in a statement released on Saturday 21 November.

“It is therefore urgent that the government and its social partners work together to ensure that we maintain the sanctity of the fiscal framework and implement much-needed structural economic reforms to avoid further damaging our sovereign rating.”

S&P confirmed South Africa’s long-term foreign and local currency debt ratings at “BB-” and “BB”, respectively. The agency maintained a stable outlook.

According to S&P, lockdowns associated with the fight against the Covid-19 pandemic plunged South Africa into its sharpest quarterly economic contraction in the second quarter of 2020, leading to a significant widening of the budget deficit and a rapid increase in public debt.

Nonetheless, it looks like the economy is starting to rebound in the third quarter.

Fitch downgraded South Africa’s long-term debt and local currency ratings to “BB-” from “BB”. The agency maintained a negative outlook.

According to Fitch, the downward revision and negative outlook reflect high and growing public debt exacerbated by the economic shock triggered by the Covid-19 pandemic.

In addition, the country’s very low trend growth and exceptionally high inequalities will continue to complicate fiscal consolidation efforts, he said.

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Moody’s has downgraded South Africa’s long-term foreign and local currency debt rating to “Ba2” from “Ba1”. The agency maintained a negative outlook.

According to Moody’s, the downward revision reflects the impact of the pandemic shock, both directly on the debt burden and indirectly by intensifying the country’s economic challenges and social obstacles to reforms.

In addition, South Africa’s ability to mitigate the shock in the medium term is lower than that of many sovereigns due to significant fiscal, economic and social constraints and rising borrowing costs.

The government’s political priorities remain economic recovery and fiscal consolidation, as outlined in President Cyril Ramaphosa’s reconstruction and economic recovery plan and in the medium-term fiscal policy statement released in October, the Treasury said.

“The social pact between government, business, workers and civil society prioritizes short-term measures to support the economy, alongside crucial structural economic reforms.”

Cash looking for positives

The Treasury further noted that rating agencies have indicated that South Africa’s rating strengths include a credible central bank, flexible exchange rate, actively traded currency and deep capital markets, which which should help offset weak economic growth and fiscal pressures.

“The government is imploring all members of society to adhere to all health and safety protocols necessary to prevent a second wave of Covid-19 infections that would have significant adverse consequences for the economy and plans to boost the ’employment.”

Poor quality implications – what this means for the average South African

The Treasury said the shock of the Covid-19 pandemic has hit South Africa at a difficult time. Recent downgrades have allowed South Africa to achieve its lowest credit rating levels from the “big three” rating agencies since 1994.

“Economic growth has continued to decline despite attempts to reduce structural constraints.

“Financial strains on the government from the pandemic, weak economic growth, high wage bill as well as continued support for financially weak public enterprises have weakened public finances and led the government to accumulate debt.”

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The government has accumulated nearly R4 trillion in debt outstanding and is spending approximately R226 billion on interest charges.

“If the cost of borrowing for the government increases, it means that the government will either have to cut social spending or tax more the few working people, which is bad for the country,” the financial institution said. ‘State.

Further downgrades will prolong the impact of lockdown restrictions, he warned. “These restrictions resulted in the dismissal of many workers, as companies temporarily closed doors and reduced operational costs.

“Without any disposable income and without an increase in the cost of goods, it will be difficult to maintain the standard of living.”

According to the Treasury, a continued downgrade in ratings will translate into unaffordable debt costs, deterioration in asset values ​​(like pensions, other savings and property) and reduced disposable income for many.

“The rating downgrades associated with Covid-19 have also led many small businesses to shut down and lay off a number of workers.

“Operational costs as well as borrowing costs are expected to increase, supporting the motive to pass costs on to consumers or lay off more workers,” he says.

Recent ratings results mean that South Africa needs to accelerate growth strategies to address debt build-up and minimize the costs associated with negative sentiment.

“Operation Vulindlela is a key initiative in this regard and demonstrates the government’s commitment to accelerate the implementation of essential reforms that stimulate economic growth and improve fiscal sustainability,” the Treasury said.

Mboweni’s medium-term budget last month showed plans to reduce the government’s wage bill, which has jumped 51% since 2008, as part of an effort to start reducing the trajectory of public debt after 2026, Bloomberg reported.

The proposed wage freeze risks a backlash from politically influential labor groups that are already in a legal battle with the government to honor an agreed wage deal.

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If state wages cannot be cut, there is little room for offsetting measures in other areas of spending, Bloomberg said.

Sanisha Packirisamy, economist at Momentum Investments, said the downgrade would also have the following implications:

  • Higher borrowing costs for the government will crowd out spending on much needed social and economic programs;
  • A further blow to business confidence could lead to lower fixed investment rates, weaker growth and increased downward pressure on jobs;
  • A new negative bias on ratings could lead to a more depreciated currency, higher cost of imported goods, rising inflation and the limited extent to which the South African Reserve Bank can maintain an accommodative monetary policy;
  • On Moody’s scale, South Africa’s sovereign rating is now in line with Brazil, but above Turkey (B2), on the Fitch scale, South Africa ranks on par with Turkey and Brazil;
  • At 234 points, South Africa’s five-year corporate swap (CDS) spread is 263 points below the April 2020 high for Covid-19, it trades 60 points more than the CDS of Brazil and 143 points of less than the CDS of Turkey.

By definition, downgrading the rating to become undesirable implies that holders of South African sovereign debt should include a higher risk premium in the valuation of the asset class to reflect a future risk of higher default, Packirisamy said.

“However, international precedent has shown that downgrading ratings to the non-investment grade range has less impact on sovereign yield levels than downgrading from investment grade to junk.”

Indeed, this last decision could have mandate implications for bondholders and therefore trigger a forced sale., as such, the country’s exclusion from global bond indices after it was demoted to junk status by Moody’s in March this year was more important to returns, Packirisamy said.

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