SA’s downgrade to credit-risk junk status could not have come at a worse time and begs the question of whether credit rating reviews make sense in a time of crisis.

With Moody‘s following its peer agencies and rating the country below investment grade, South Africa has fallen out of important bond indices, making it much more expensive for the country to borrow money.

The downgrade has already had consequences. Following the announcement, the rand lost nearly 2% against the dollar, which meant a loss of more than 6% since the beginning of March. 

Over the next week, we will see whether the markets had already priced the downgrade in, as some analysts suggested.

Even if the downgrade is priced in, the move will result in further pain for an economy that was already shrinking prior to the lockdown and will undoubtedly have a negative impact on the national budget.

The irony is that Covid-19 has forced South Africa to implement some of the structural reforms that might have saved it from a downgrade. On Wednesday, the South African Reserve Bank stepped into the secondary bond market to purchase government bonds with newly created money.

In an interview in Business Day Investec Wealth & Investment investment strategist Brian Kantor welcomed the move.*

“In normal circumstances, printing money to fund spending leads to inflation. But in these circumstances, there is no demand — demand is collapsing as people lose their incomes. It’s about trying to get income into people’s hands so that they can buy food and essential items, otherwise they will starve to death. The Bank has finally come to terms with the situation,”
he said.

said: “In normal circumstances, printing money to fund spending leads to inflation. But in these circumstances, there is no demand — demand is collapsing as people lose their incomes. It’s about trying to get income into people’s hands so that they can buy food and essential items, otherwise they will starve to death.”

With this move, the cost of borrowing will be lowered and increase the government’s ability to issue debt to counter the effects of the coronavirus pandemic.

The question now is how the government and the Reserve Bank will address the aggravated situation. What measures can it take to stabilise the country’s economy? Can a sell-off in local assets be prevented?

One minor consolation is that South Africa is not alone in the economic challenges it faces. Most economies around the world are under pressure, facing something unprecedented.

Knowing this, shouldn’t rating agencies put their decisions on hold in extraordinary circumstances? BM

 * This article has been corrected after this quote was miss-attributed to Reserve Bank deputy governor Fundi Tshazibana. We apologise for the error.