Latest downgrading of SA credit ratings highlights fiscal crisis, BLSA says
JOHANNESBURG - The downgrading of South Africa’s credit rating by two of the three main global agencies reinforces the fiscal crisis the country is facing and is a blow to its economic recovery, a leading business association said on Monday.
Fitch last Friday cut South Africa’s long term foreign and local currency debt ratings to ‘BB-’ from ‘BB’ and maintained a negative outlook, citing high and rising government debt exacerbated by the economic shock triggered by the Covid-19 pandemic.
Moody’s followed suit, lowering the country’s long term foreign and local currency debt ratings to ‘Ba2’ from ‘Ba1’ and maintaining a negative outlook, also due to the impact of the global health crisis.
The third agency, S&P, however affirmed South Africa’s long term foreign and local currency debt ratings at ‘BB-’ and ‘BB’, respectively and kept its stable outlook.
On Monday, Business Leadership South Africa (BLSA) said the downgrades were going to hurt by making it even more expensive for the government to borrow, even as it grapples with a budget deficit expected to widen to 15.7 percent of gross domestic product in the current financial year.
Last month, Finance Minister Tito Mboweni said debt was expected to reach 81.8 percent of GDP, warning that with debt stock skirting the R4 trillion mark (US$260 billion), the country risked a sovereign default.
“Both Moody’s and Fitch have sounded the alarm about government’s debt levels and its seemingly limited ability to get out of the current trend,” BLSA chief executive officer Busi Mavuso said in a weekly newsletter.
The latest reviews were also a blow to the credibility of an economic recovery plan unveiled by President Cyril Ramaphosa last month, Mavuso said, adding:
“Two major agencies are effectively saying they don’t think it will work.”
Ramaphosa tabled the programme for a economy that was ailing even before the Covid-19 pandemic led to a months-long lockdown that grounded all but essential services and led to about two million job losses.
Under the plan, the government aims to invest R100 billion (US$6.5 billion) over the next three years towards creating jobs. Critics however say the government should instead focus on creating an environment that allows the private sector to drive employment.
Mavuso noted that even S&P, which offered a slightly more optimistic outlook for the economy than peers Moody’s and Fitch, said the recovery plan “contains approaches mooted in the past” and depended on private sector investment that may be crowded out by the government’s debt requirements.
“S&P is right that the recovery plan largely covers ground that was well understood before this crisis,” she said.
“The structural reforms we have been hammering on about have been needed for years. This is the only way we can provide an impetus to the private sector to boost investment, given that fiscal stimulus is not an option.”
The the government could not increase spending, but could ensure that spending delivered more to the economy by shifting it out of consumption and into investment, said Mavuso.
“That means public sector wages are one of the key areas for restraint,” she said.
Last week’s spectacles, including at public broadcaster SABC where management was forced to delay a retrenchment process, as well as demands from the taxi industry for Covid-19 relief from the government, “showed how out of touch some are”, the BLSA boss said.
“The public sector has to adjust to the fact that our economy is smaller than it was and that it doesn’t have the financial muscle to borrow any more,” said Mavuso.
“It has to shrink, just as the private sector has shrunk. To try and continue with business as usual will be to continue pushing against economic reality. It will lead to more downgrades and eventual collapse when our funders say: no more.”
African News Agency