moody's ratings agency

A sign for Moody’s rating agency in front of the company headquarters in New York. Photo: Emmanuel Dunand / AFP

Junk Status: Moody’s downgrade hits South Africa at ‘worst possible time’

Credit-rating agency’s decision to move the country to sub-investment grade not unexpected, but adds to our current financial market stress.

moody's ratings agency

A sign for Moody’s rating agency in front of the company headquarters in New York. Photo: Emmanuel Dunand / AFP

Moody’s has become the last of the big three credit-rating agencies to downgrade South Africa’s sovereign credit rating to junk status. The announcement was made late on Friday night, 27 March 2020.

This means that South Africa will now have to leave the important FTSE World Government Bond Index (WGBI). Participation in the index requires a country to have at least one investment-grade rating by one of the credit-rating agencies. The other agencies, Fitch and Standard & Poor’s, downgraded SA in 2017.

The decision has been widely expected and some analysts believe it will not have a major impact on the economy as the markets have been pricing in this likelihood for the past 1-2 years.

Not market-moving, but decision will raise the cost of capital

“It may not be a market-moving event at this juncture, but is important going forward as sub-investment grade from all three rating agencies will undoubtedly raise the cost of capital or funding in South Africa,” said economist Hugo Pienaar of the Stellenbosch University’s Bureau for Economic Research in an interview with Reuters.

“In our view, the Moody’s downgrade itself has for some time been discounted by financial markets, though it remains uncertain exactly what impact the subsequent World Government Bond Index (WGBI) expulsion will have,” said Standard Bank economist Elna Moolman. “Guided by global examples in this regard, it is possible that the bulk of the repricing has already occurred.”

Moody’s decision due to weak economic growth, ongoing deterioration

The Moody’s decision is to downgrade the country to junk status with a negative outlook because of South Africa’s weak economic growth and ongoing deterioration in the government’s fiscal strength.

“Moody’s does not expect current policy settings to address [these] effectively. Both outcomes speak to weaker economic and fiscal policy effectiveness than Moody’s previously assumed,” the agency 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.”

Moody’s added: “Structural issues such as labour-market rigidities and uncertainty over property rights generated by the planned land reform remain unaddressed. Moreover, a strategy to stabilise electricity production has been slow to emerge and has yet to prove its effectiveness.”

National Treasury says decision could not have come at a worse time

In its response, National Treasury observed that “the decision by Moody’s could not have come at a worse time. South Africa, like many other countries, is seized with containing the outbreak of the coronavirus.

“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,” National Treasury said.

“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.”

In a personal response, Finance Minister Tito Mboweni noted: “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.”