Moody's cuts South Africa's rating further into junk territory on fiscal concerns

The rating agency's latest assessment reflects the Covid-19 impact on Africa's most industrialised economy

The construction of Africa's tallest building, the Leonardo in Sandton, Johannesburg on Tuesday, September 17 2019. Pic: Waldo Swiegers / Bloomberg

Moody’s Investors Service cut South Africa’s credit rating further into junk category, citing expectations the continent's second-largest economy will weaken further over the medium term because of Covid-19's impact.

The ratings agency cut the nation’s foreign and local currency rating to Ba2, two levels below investment grade, and maintained its negative outlook.

Moody's became the last of the big three ratings agencies to downgrade South Africa's debt to junk in March this year. Its latest assessment also accounts for the effects of the pandemic, “both directly on the debt burden and indirectly by intensifying the country's economic challenges and the social obstacles to reforms”, it said.

“The crisis will leave long-term scars on South Africa's fiscal position, through two channels: a severe loss in revenue of about 5 per cent of gross domestic product, which the government cannot fully and quickly compensate through spending cuts nor recover; and rising borrowing costs.”

The government will register a wider deficit for 2020 financial year, which will persist into the medium term, “resulting in a markedly steeper and more prolonged increase in the debt burden than expected in March”, Moody’s said.

The increased deficit means South Africa's government debt-to-GDP ratio will rise to 110 per cent by the end of its 2024 fiscal year – including guarantees for sovereign-owned enterprises – equivalent to a 40 percentage point increase from its 2019 financial year, according to Moody's.

While South Africa is not alone in having been severely affected by the crisis, its capacity to mitigate the shock over the medium term is lower than that of many sovereigns given significant fiscal, economic and social constraints and rising borrowing costs.

South Africa is set to shrink 8 per cent this year before expanding 3 per cent next year, according to International Monetary Fund estimates.

Moody’s expects South Africa's growth to remain structurally low at around 1 per cent in real terms over the medium term. The low growth potential pre-dates the coronavirus shock, but the crisis will intensify the country’s longstanding social and economic constraints, making reforms even more challenging to implement.

South Africa has focused on structural reforms and fiscal consolidation in recent years to promote medium-term growth.

However, “while the [government] strategy remains in place, implementation risks have risen materially”, Moody’s said.

The government has managed to make some progress on reforms, including stepping up its fight against corruption, but other efforts such as the transformation of its labour market are lagging, the ratings agency said.

“High unemployment rates will likely worsen as a result of the coronavirus shock,” Moody’s said. “In turn, the country's income inequalities, already among the highest globally prior to the crisis, are likely to intensify.”