PRETORIA - The decision by international ratings agencies Fitch and Moody’s to downgrade South Africa further is a painful one, Finance Minister Tito Mboweni said on Saturday.
"Government notes the following credit rating decisions made by the ‘big three’ rating agencies (S&P, Fitch, and Moody’s): S&P has affirmed South Africa’s long-term foreign and local currency debt ratings at ‘BB-’ and ‘BB’, respectively. The agency maintained a stable outlook,: the National Treasury said in a statement.
According to S&P, lockdowns associated with combating the Covid-19 pandemic plunged South Africa into its sharpest quarterly economic contraction in the second quarter of 2020, leading to a large widening of the fiscal deficit and rapidly rising government debt.
Nevertheless, there were indications that the economy was beginning to rebound in the third quarter.
Fitch had downgraded South Africa’s long-term foreign and local currency debt ratings to "BB-" from "BB". The agency maintained a negative outlook. According to Fitch, both the downgrade and negative outlook reflected high and rising government debt exacerbated by the economic shock triggered by the Covid-19 pandemic, the Treasury said.
Further, the very low trend growth and exceptionally high inequality would continue to complicate fiscal consolidation efforts.
Moody’s had downgraded South Africa’s long-term foreign and local currency debt ratings to "Ba2" from "Ba1". The agency maintained a negative outlook. According to Moody’s, the downgrade reflected the impact of the pandemic shock, both directly on the debt burden and indirectly by intensifying the country’s economic challenges and the social obstacles to reforms.
Furthermore, South Africa’s capacity to mitigate the shock over the medium-term was lower than that of many sovereigns given significant fiscal, economic, and social constraints and rising borrowing costs.
"Government’s policy priorities remain economic recovery and fiscal consolidation, as outlined in President Cyril Ramaphosa’s Economic Reconstruction and Recovery plan and the Medium-Term Budget Policy Statement released in October.
"The social compact agreed to between government, business, labour, and civil society prioritises short-term measures to support the economy, alongside crucial structural economic reforms," the Treasury said.
“The decision by Fitch and Moody’s to downgrade the country further is a painful one. The downgrade will not only have immediate implications for our borrowing costs, it will also constrain our fiscal framework. There is, therefore, an urgent need for government and its social partners to work together to ensure that we keep the sanctity of the fiscal framework and implement much-needed structural economic reforms to avoid further harm to our sovereign rating,” Finance Minister Tito Mboweni said in the statement.
Rating agencies had indicated that South Africa’s rating strengths included a credible central bank, a flexible exchange rate, an actively traded currency, and deep capital markets, which should help counterbalance low economic growth and fiscal pressures.
Government implored all members of society to adhere to all the necessary health and safety protocols to avoid a second wave of Covid-19 infections which would have significant adverse implications for the economy and plans to boost employment.
The Covid-19 pandemic shock hit South Africa at a difficult time. Recent downgrades saw South Africa reaching its lowest credit rating levels from the "big three" rating agencies since 1994, the Treasury said.
Economic growth had continued to decline irrespective of the attempts to reduce structural constraints. Financial strain to the government caused by the pandemic, weak economic growth, a high wage bill, as well as continuous support to the financially weak state-owned companies had weakened public finances and led to government accumulating debt.
Currently, government had accumulated debt stock of nearly R4 trillion and spent about R226 billion on interest costs.
If the cost of borrowing money for government increased, it meant that government would have to either cut back on social spending or tax more of the few people that were employed, which was bad for the country.
Further downgrades would extend the impact of lockdown restrictions. These restrictions led to many workers being laid off from work since companies were temporarily closing doors and cutting back on operational costs.
Without any disposable income and increasing costs of goods it would be difficult to maintain living standards. Continuous rating downgrades would translate to unaffordable debt costs, deteriorating asset values (such as retirement, other savings, and property), and a reduction in disposable income for many.
Rating downgrades associated with Covid-19 had also resulted in many small businesses closing down and laying off a number of workers. Operational costs together with borrowing costs were expected to increase, supporting the motive to pass through the costs to consumers or further laying off workers.
"The recent rating outcomes mean that South Africa needs to fast-track growth-enhancing strategies in order to rectify the accumulation of debt and minimise the costs associated with negative sentiments.
"Operation Vulindlela is a key initiative in this regard and demonstrates government’s commitment to fast-tracking the implementation of critical reforms that raise economic growth and improve fiscal sustainability, the Treasury said.
- African News Agency (ANA)