The Moody’s downgrade which struck South Africa on Friday, 27 March – the same day the lockdown to contain the Covid-19 pandemic began –  was no surprise. It was on the cards even before the coronavirus threatened to turn a recession into a full-blown depression. 

“Moody’s signalled in late 2019 that it would downgrade the credit rating to sub-investment grade when it changed South Africa’s outlook to ‘negative’ and were very clear that major policy changes were needed in order to escape junk status. President Cyril Ramaphosa’s SONA and Finance Minister Tito Mboweni’s budget speech both failed to deliver any of these changes, so the Moody’s downgrade was inevitable,” Shawn Duthie, managing director of Inyani Intelligence, told Business Maverick. 

This completed a “junk” hat trick as the other main ratings agencies Fitch and S&P had already dispensed with the fiction that South Africa was in the investment-grade league in 2017. Moody’s only took the rating down one notch to ‘Ba1’ from the last investment-grade wrung of ‘Baa3’, but its outlook remains negative, which means a further downgrade could follow. That seems certain at this point. 

This downgrade will see South Africa’s removal from the World Government Bond Index (WGBI), which will make Pretoria’s debt a ‘no go’ for many funds which track the index. That could see a sell-off of billions of dollars in South African government debt but the WGBI will not be rebalanced before the end of April, and that could buy some time. 

“The key driver behind the rating downgrade to Ba1 is the continuing deterioration in fiscal strength and structurally very weak growth, which  Moody’s does not expect current policy settings to address effectively. Both outcomes speak to weaker economic and fiscal policy effectiveness than Moody’s previously assumed,” Moody’s said in a statement. 

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

An “inexorable rise in government debt” is now seen with the debt burden climbing “under any plausible economic and fiscal scenario.” 

This is a polite way of saying that a reduction in South African government debt is now implausible. 

“Debt-to-GDP increased by 10 percentage points (ppts) over 2014-18 and will rise by a further 22 ppts over 2019-23 under Moody’s baseline projections. Over that timeframe, Moody’s expects primary deficits to persist. The fiscal deficit will widen in fiscal 2020 to around 8.5% of 

GDP, as revenue declines this year, only narrowing very gradually thereafter. Fiscal strains from interest payments and support to state-owned enterprises will continue,” Moody’s said. 

On this front, it must be said that any such forecast is really a thumb suck at the moment. The point is that if things worsen, which they certainly will, another downgrade will be in the offing. 

“In this context, and consistent with the recently announced budget, any fiscal consolidation will rest primarily on containing the large and growing public sector wage bill. The government aims to achieve R160-billion (3% of GDP) in savings over the next three fiscal years by keeping wage growth below inflation. That would mark a material departure from current agreements and past outcomes, and as such is likely to prove challenging to implement,” Moody’s said.

This means that Moody’s sees little prospect for cuts to the public sector wage bill, which soared under former president Jacob Zuma as he expanded ANC patronage networks with little to show in the way of improved public services. Everyone is in for a rough few weeks or few months and that makes followup austerity measures politically radioactive, with plenty of fuel for South Africa’s inferno of social discontent. 

“Social considerations are material for South Africa’s credit profile and their implications for the economy and public finances are a driver of the rating downgrade. Deep socio-economic inequalities complicate the implementation of reforms that would otherwise unlock the economy’s significant potential. They also contribute to tensions and resistance from key stakeholders that ultimately fuel political risk,” Moody’s said. 

TREMBLING IN OUR BOOTS

Finance Minister Tito Mboweni, who is usually blunt and honest on such issues, admitted to fear.  ” … to say we are not concerned and trembling in our boots about what might be in the coming weeks and months is an understatement,” he said.

The National Treasury noted in the statement that: “Non-residents currently hold approximately 37% (R800 billion) of the total domestic government bonds and the number is expected to substantially decline with the combined impact of COVID-19 and the downgrade. The interest rate for government, households and the broader economy is also expected to increase as a result. While some market participants argue that the impact of a sovereign downgrade has already been priced in, it is difficult to stipulate with certainty the extent.”

The South African Reserve Bank (SARB) has now caught the quantitative easing bug and is buying domestic government bonds. It could conceivably sop up some of this debt. 

“The SARB has recently reminded everyone of its role in ensuring the orderly functioning of markets.  It is also able to purchase bonds in the secondary market, on an unsterilised basis, at a time when there is little threat of inflation in South Africa. This may help to offset some of the selling,” said Razia Khan, chief African economist at Standard Chartered. 

South Africa it must be said is hardly alone. Government debt across the globe is going to surge because of stimulus and relief packages while economies contract, and so there may well be a tsunami of downgrades in the offing. In this sense, the move by Moody’s is a sideshow. Still, South Africa is trembling in its boots. BM