New ratings push SA deeper into junk zone

Business has called on government to urgently implement structural reforms, saying the time for talking was over as South Africa fell deeper into junk territory after Moody’s Investors Service and Fitch Ratings downgraded the country’s credit ratings and maintained a negative outlook last Friday.

However, S&P Global Ratings affirmed South Africa’s long term foreign and local currency debt ratings at “BB-” and “BB”, respectively, and maintained a stable outlook.

Cas Coovadia, the chief executive of Business Unity South (Busa), said the organisation hoped the latest sovereign ratings downgrades would galvanise the country into taking urgent action to get on to the road to address the reasons raised by Moody’s and Fitch for the downgrades.

Moody’s and Fitch both highlighted the high and rising government debt triggered by the Covid-19 pandemic as a threat to the country’s fiscal stability over the medium-term.

South Africa’s debt was forecast to peak at 93 percent of gross domestic product (GDP) in 2023/24 when the country will be spending almost 6 percent of GDP on debt service costs.

Right now, the government is borrowing at a rate of R2.1 billion per day and debt servicing costs are among the government’s top four expenditure items at R3.4bn.

Moody’s said the maintenance of the negative outlook reflected the risks that the debt burden and debt affordability could deteriorate significantly more than it currently projects.

The ratings agency now projects government debt-to-GDP to rise to 110 percent by the end of 2024 fiscal year.

“The crisis will leave long-term scars on South Africa’s fiscal position,” Moody’s noted.

South Africa also experienced large capital outflows at the height of the pandemic shock, and a fall in the share of non-resident holdings in local-currency government bonds from 37 percent at end-2019 to 29 percent in October.

Fitch indicated the large foreign holdings of South Africa’s local-currency government bonds continued to pose a risk for fiscal financing and external stability.

“However, the fully flexible exchange rate regime combined with a low share of foreign-currency denominated debt in total government debt, at 11.8 percent in October, are important shock absorbers,” pointed out.

Busa said business stood ready to work with the government and other social partners to co-operate in efforts to address the issues raised by the National Treasury and the rating agencies. “However, we firmly believe we do not have to continue discussions on what needs to be done.

“Social partners, including the government, have identified immediately implementable areas … we urge the government to, after such consultations, take the hard decisions and implement. We cannot wait until all social partners reach consensus on all issues,” Busa said.

Finance minister Tito Mboweni said the decision by Fitch and Moody’s would not only have immediate implications for South Africa’s borrowing cost, but it would also constrain the fiscal framework.

“There is, therefore, an urgent need for the 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.

Old Mutual’s chief economist Johann Els, however, said he was not sure if the downgrade would lead to significant rise in borrowing costs and elevate the real yield on government debt as the ratings were already on sub-investment.

“I’m not sure if this will add further because the global economy is recovering due to Joe Biden’s victory in the US election and hopes for the Covid-19 vaccine, pushing a risk on trade into emerging markets,” Els said. “Our medium-term outlook is slowly improving.” -BusinessReport