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Moody’s bleak budget reaction sparks junk status fears for South Africa

South Africa’s best credit rating comes from Moody’s. But when the agency say there’s been “an erosion of fiscal strength”, talk of junk status soon follows.

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Credit ratings agency Moody’s have released their reaction to the budget speech which took place on Wednesday, and it does not bode well for Mzansi. They believe that Tito Mboweni’s address only served to highlight the country’s “limited fiscal flexibility”.

As BusinessLive revealed, Friday 29 March 2019 is the date that Moody’s will announce their decision on whether they will downgrade our credit status or leave it as it is.

Moody’s: What is South Africa’s credit rating?

Moody’s has South Africa’s rating at Baa3, one notch above sub-investment grade. Anything underneath this – figures such as Ba1, Ba2 and Ba3 – will drag South Africa into the doldrums of “junk status”. When slipping below the investment grade, it acts as a severe warning to foreign powers that they must not put their money into South Africa.

Moody’s remain as the institution with the most positive outlook for Mzansi. But comments released by the group on Wednesday evening now paint a very gloomy picture.

“This budget highlights the government’s limited fiscal flexibility amid a challenging economic environment. The budget shows a further erosion in fiscal strength after the October medium-term budget policy statement already pointed to wider deficits for longer.”

Lucie Villa, senior credit management.

Credit ratings explained

Any sort of downgrade from the group would push Mzansi into sub-investment status for the third time in two years. Agencies S&P and Fitch downgraded SA to junk in 2017, following a poor market slump under the stewardship of Jacob Zuma.

However, the new dawn promised by his replacement Cyril Ramaphosa hasn’t quite materialised. “Ramaphoria” was brought to a crashing halt last September when South Africa entered a technical recession.

It was a hammer blow to the economy, sending the rand on a downwards spiral and denting the financial confidence Ramaphosa had promised to bring to the country. The economy emerged from recession in December, but this budget speech and a subdued SONA hasn’t exactly inspired the international audience.

Finance Minister Mboweni has revealed his team will be meeting with Moody’s creditors later on Thursday afternoon. Given that the government are determined to stand by Eskom – without meeting a full bailout package – Mboweni and his team aren’t likely to convince Moody’s that things will only get better.