Moody’s downgrades SA to junk status

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CAPE TOWN, March 28 – Moody’s Investors Service’s decision to downgraded South Africa to junk status could not have come at a worst time as the country, like many other countries, was seized with containing the outbreak of the novel coronavirus (Covid-19), National Treasury said.

Moody’s downgraded South Africa’s long term foreign and local currency debt ratings to ‘Ba1’ from ‘Baa3’ and maintained the negative outlook. The downgrade meant that South Africa’s credit ratings was one notch below investment grade.

Responding to the downgrade, treasury said: “The impact of Covid-19 is felt across various sectors of the economy including the financial markets which experienced a significant sell-off in equities, bonds and exchange rates as investors retreated to safe haven securities amid the uncertainty.

“The sovereign downgrade will further add to the prevailing financial market stress. These two events will truly test South African financial markets. South Africa’s deep, stable financial sector and robust macroeconomic policy framework have always been flagged as a credit strength, including the South African Reserve Bank’s demonstration of a good track record in implementing credible and effective monetary policy and preserving financial stability.”

Treasury said that the negative outlook reflected the risk that economic growth would prove even weaker and the debt burden would rise even faster and further than currently expected, “weakening debt affordability and potentially, access to funding”.

Deciding on the downgrade, Moody’s said the key drivers behind the downgrade were structurally very weak growth and constrained capacity to stimulate the economy; and inexorable rise in government debt over the medium term.

The South African government said it noted the decision and said the sovereign downgrade would further see South Africa being excluded from the FTSE World Government Bond Index (WGBI) and the government bond market is expected to experience further capital outflows as fund managers with investment grade mandates would be forced to sell South African government bonds.

It said that non-residents currently held around 37 percent (R800 billion) of the total domestic government bonds and the number was expected to substantially decline with the combined impact of Covid-19 and the downgrade.

With the downgrade, the interest rate for government, households and the broader economy was also expected to increase as a result.

Treasury said that while some market participants argued that the impact of a sovereign downgrade had already been priced in, it was difficult to stipulate with certainty the extent.

“Therefore, to say we are not concerned and trembling in our boots about what might be in the coming weeks and months is an understatement,” Minister of Finance, Mr Tito Mboweni, said.

President Cyril Ramaphosa announced a number of measures to offset the Covid-19 impact on the economy and its people including a 21-day lockdown which commenced on March 27, to combat the spread of the virus. In relation to financial markets functioning, the South African Reserve Bank has also announced a set of interventions to stabilise financial markets and provide much-needed stability, treasury said.

“It is with a heavy heart to note that all three major credit ratings agencies currently rate South Africa at sub-investment grade,”Mboweni said.

“However, every crisis presents an opportunity. The opportunity we have today is to unite and work together to address our challenges. We as a people have overcome insurmountable challenges in the past and we can still overcome. We shall rise. We have to rise. We owe it to ourselves.”

Treasury said that over the short to medium term, government remained committed to implementing structural economic reforms to address the weak economic growth, constrained fiscus and the ailing state-owned companies.

It said that government was providing medium-term support to Eskom to secure energy supply and to honour the state’s contractual obligations.

“National Treasury, in partnership with the department of public enterprises, is instituting a series of measures to stabilise finances at the various state- owned companies. The sustainability of government finances remains important and critical to attain and maintain, not only for credit ratings’ sake, but more importantly for the sake of South Africans,” treasury said.

“Government urges all South Africans to unite, remain positive and continue to work hand- in-hand to turn the economy around.”

– African News Agency (ANA)