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South Africa Descends Deeper Into Junk After Two Downgrades

Hari Govind and Rene Vollgraaff
·3-min read

(Bloomberg) --

South Africa fell deeper into junk territory after Moody’s Investors Service and Fitch Ratings lowered the country’s credit ratings on Friday.

The ratings cuts come after the coronavirus pandemic pummeled the government’s finances and pushed the economy into its longest recession in almost three decades. Finance Minister Tito Mboweni said on Saturday the downgrades will have immediate implications for borrowing costs and will constrain the fiscal framework.

Still, South Africa had already dropped out of the FTSE World Government Bond Index after Moody’s removed the nation’s last investment-grade rating in March. That may reduce the impact of the downgrades, according to Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Bank.

“The market implications of the latest rating action looks more benign,” Khan said in an emailed note. “If anything, reform momentum is looking more positive near term.”

Moody’s cut the nation’s foreign- and local-currency ratings to Ba2, two levels below investment grade, from Ba1. The outlook remains negative. Fitch cut its ratings to BB-, three levels below investment grade, from BB, also with a negative outlook.

Only five of 23 economists surveyed by Bloomberg predicted Moody’s would lower its rating, while just four out of 21 expected a downgrade from Fitch before the end of the year. The negative outlook on both ratings mean the next moves from these companies could be even further cuts that would signal an increased probability of a default.

Wage Freeze

The pandemic has weighed on revenue collection and raised the cost of borrowing. Mboweni’s medium-term budget last month showed plans to pare the government salary bill, which has surged 51% since 2008, as part of an effort to start bringing its debt trajectory down after 2026.

However, that wasn’t enough to stave off ratings downgrades until after the February 2021 budget, as many economists had predicted.

“The key driver behind the rating downgrade to Ba2 is the further expected weakening in South Africa’s fiscal strength over the medium term,” Moody’s said in a statement. Fitch said in a separate release that “GDP is expected to remain below 2019 levels even in 2022.”

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 pay deal. If state salaries can’t be cut, there’s limited room for offsetting measures in other expenditure areas. The central bank has signaled it won’t reduce interest rates any further and there’s no room in the budget to increase spending to boost growth.

There is “an urgent need for government and its social partners to work together to ensure that we keep the sanctity of the fiscal framework and implement much-needed structural economic reforms to avoid further harm to our sovereign rating,” Mboweni said Saturday.

S&P on Friday kept its assessment of South Africa’s foreign-currency debt three levels below investment grade, with a stable outlook.

(Updates with Treasury comment from second paragraph)

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