Finance Minister Tito Mboweni has described as a “painful” decision by international credit rating agencies – Moody’s Investors Service and Fitch Ratings Agency – to further downgrade South Africa’s credit rating to junk status.
In a statement released by the National Treasury on Saturday, Mboweni said the downgrade would not only have immediate consequences for South Africa’s borrowing costs but would also limit the country’s fiscal policy framework.
Moody’s and Fitch further downgraded South Africa’s credit rating to junk status 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 was hit after South Africa was already in a recession after two quarters of negative economic growth.
As a result, Moody’s reduced South Africa’s foreign and local exchange rates to Ba2, two levels below the investment class, from Ba1. Fitch followed suit and cut the country’s foreign and local exchange rates to BB, three levels below investment class, from BB.
Both authorities emphasized that the downgrades also have a negative view.
South Africa is not alone in being hit hard by the crisis, but its ability to mitigate the shock in the medium term is lower than too many sovereign in view of significant financial, economic and social constraints and rising borrowing costs, Moody’s said.
Moody’s Investors Service
According to a statement from Moody’s, the main driver of the Ba2 rating was the further expected weakening of South Africa’s fiscal strength over the medium term.
The rating agency said, while the rating measure earlier this year reflected an erosion in the country’s credit profile, but Friday’s measures reflected the rating agency’s assessment of the impact of the pandemic shock, both directly on the debt burden and indirectly by intensifying the country’s economic challenges. and the social barriers to reform.
“Although South Africa is not alone in being hit hard by the crisis, its ability to mitigate the shock in the medium term is lower than for many sovereigns in view of significant financial, economic and social constraints and rising borrowing costs,” Moody’s said. .
The Agency added that the government relied on structural reforms to promote medium-term growth and on fiscal consolidation. But while the strategy remained in place, the implementation risks had increased significantly.
Fitch’s downgrade and negative outlook also reflected a high and rising government debt, exacerbated by the economic shock triggered by the Covid-19 pandemic
Fitch said that South Africa’s results for economic growth and GDP are expected to be below last year’s level until 2022.
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It said the particularly tight shutdown in the second quarter, combined with the broader global and domestic fallout from the pandemic, led to a sharp drop in production.
Fitch said it acknowledged that South Africa’s economic recovery would improve after the third quarter was eased, but still expected GDP to fall by 7.3% this year.
“Due to base effects, growth will increase to 4.8% next year but then slowly down to 2.5% in 2022.
“We believe that trend growth will remain around 1.5%, and there is a risk that the lasting effects of the pandemic may further offset trend growth. Investment spending had already weakened in recent years and fell last year to the lowest level in real terms since 2012, reflecting challenges for the business environment such as poor reliability of power supply, labor market inflexibility and subdued domestic demand, says Fitch.
Unlike Moody’s and Fitch, S&P Global Ratings confirmed South Africa’s long-term credit ratings in foreign currency and local currency on BB and BB, respectively. S&P maintained a stable outlook for the country. The agency said that although the blockades in the fight against the Covid-19 pandemic plunged South Africa into its sharpest quarterly economic downturn in the second quarter of this year, leading to a large widening of the budget deficit and rapidly rising government debt, “nevertheless, there are indications that the economy begins to recover during the third quarter ”.
At present, the state has accumulated a debt portfolio of almost R4 trillion and spends approximately R226 billion on interest expenses. The constant support for the financially weak state-owned companies has weakened public finances and led to the state accumulating debts
In response to the country’s downgrades of credit ratings, Mboweni said there was an urgent need for the government and its social partners to work together to ensure South Africa maintains the fiscal framework and implements the much-needed structural economic reforms to avoid further damage to the country’s sovereign rating.
City Press has previously reported that the Covid-19 pandemic chef hit South Africa at a difficult time. Economic growth has continued to decline regardless of attempts to reduce structural constraints.
The financial burden on the government was a result of the pandemic, the weak economic growth, the high public wage costs and continuous support for state-owned companies.
Mboweni said: “Currently, the government has accumulated a debt portfolio of almost R4 trillion and is spending about R226 billion on interest costs. The constant support for the financially weak state-owned companies has weakened public finances and led to the government accumulating debt. ”
The minister said the recent downgrades saw South Africa achieve the lowest credit rating levels of the “big three” credit rating agencies since 1994. He added that continuous downgrades would translate into unaffordable debt costs, deteriorating asset values such as pensions, other savings and real estate. and reducing disposable income for many.
“If the cost of borrowing money for the government increases, it means that the government must either cut social spending or tax more the few people who are employed, which is bad for the country.
“Further downgrades will expand the effects of the restrictions on locking.
“These restrictions led to many workers being laid off as companies temporarily closed their doors and reduced operating costs. Without disposable income and increased product costs, it will be difficult to maintain the standard of living, says Mboweni.