Moody’s could hold decision on SA downgrade, for now

File: Moody’s is still scheduled to announce its decision at the end of the week.

File: Moody’s is still scheduled to announce its decision at the end of the week.

AFP

JOHANNESBURG - South Africa enters into a 21-day lockdown period in the face of a global pandemic, an economy in recession and a possible downgrade by rating’s agency Moody’s.

Most businesses will close and citizens will largely be confined to their homes as the country grapples with the spread of the coronavirus. This will bring South Africa’s already ailing economy to a standstill. 

Moody’s is still scheduled to announce its decision at the end of the week. The ratings agency is the last of the big three ratings agencies — Moody’s, Fitch and S&P Global — to keep the country’s credit rating as stable. 

READ: Moody's cuts South Africa's growth forecast

So far, the country has avoided a downgrade by Moody’s despite high public debt, weak economic growth and lower than expected tax collection. In its last review of South Africa’s creditworthiness, Moody’s downgraded the country’s sovereign rating to negative from stable and put it on notice for a downgrade to junk. 

The economic shock of Covid-19, however, could change that. The virus will negatively affect global and domestic economic growth through the first half of the year, and potentially longer depending on the steps taken to limit its spread. 

Following the presentation of the national budget in February — which showed that the country’s borrowing costs will increase to up to 70 percent of gross domestic product over the medium term — the market had already begun to anticipate a downgrade from Moody’s this month. 

READ: Moody's reduces SA's growth outlook

The national treasury says the funding for the containment of the virus and the economic consequences of a three-week lockdown will come from a re-prioritisation of the national budget. Tshola says this is key to the government delivering on it promises to cut costs where it can. 

In November, Moody’s flagged load-shedding, government debt inequality and slow economic growth as among the risk factors that could lead to the country being downgraded.

Since then, those risk factors have materialised and are likely to be exacerbated by the economic downturn as a result of Covid-19. 

READ: South Africa enters recession

Also increasing the risk of a downgrade is the stalemate between the public sector unions and government around the 9% wage increase for the next three years. 

If downgraded, South Africa would be excluded from the FTSE World Government Bond Index, which would force some institutions that have not already sold off the country’s debt to do so. This could lead to an increase in already high borrowing costs.

Source
IRESS