JOHANNESBURG - The South African bond market and the rand are likely to face a tough week that could see the local currency breaching the psychological barrier of R18 to the dollar, and a massive sell-off as investors digest Moody’s downgrading of the country’s sovereign debt on Friday.
Moody’s cited the country’s deteriorating fiscal metrics and poor structural economic growth prospects as some of the main contributors to the downgrade.
It said achieving meaningful savings in the country’s public sector wage bill would prove challenging; the Budget deficit would expand to 8.5percent of gross domestic product (GDP); and the government debt ratio, including guarantees could rise to as high as 91percent in three years.
Moody’s slashed the country’s long-term foreign and local currency debt ratings to junk, adjusting it from Ba1 to Baa3, while maintaining the negative outlook on the economy.
Moody’s said the decision was based on the continuing deterioration in fiscal strength and structurally very weak growth, which Moody’s did not expect current policy settings to address effectively.
“The government’s own capacity to limit the economic deterioration in the current shock and more durably is constrained,” Moody’s said.
“Fiscal space is very limited and looser monetary policy will not address the underlying structural problems.”
Moody’s cited unreliable electricity supply; persistently weak business confidence; and investment as well as long-standing structural labour market rigidities, which continue to constrain economic growth.
It said the negative outlook reflected
weak economic growth and a debt burden that would rise faster than expected, weakening debt affordability and, potentially, access to funding.
Moody’s said South Africa’s R3.56trillion debt burden would rise over the next five years under any plausible economic and fiscal scenario.
The agency said the government’s gross debt ratio was now expected to climb from 65.6percent to 91percent of GDP, and the deficit to widen from 6.8 to 8.5percent in the near term.
It said South Africa risked another credit rating downgrade, potentially before the end of this year.
South Africa’s debt rating is now rated below investment grade by all three major ratings agencies: Standard & Poor’s, Fitch and Moody’s.
Intellidex’s Peter Attard Montalto said National Treasury must move with speed to re-establish credibility.
“An emergency Budget at the end of April after lockdown, laying out transparently what is going on with growth, the revenue impact, and the implications for the fiscal framework and issuance is crucial to ensuring that Treasury keeps decent access to market for issuance into a hugely challenging April to July, as the coronavirus impact hits,” Montalto said.
“There is a huge well of underlying goodwill towards the National Treasury in markets that they need to secure rapidly.”
Momentum Investments economist Sanisha Packirisamy said the higher borrowing costs for the government would crowd out spending on social and economic programmes.
“The outlook could shift to stable if the government’s fiscal consolidation tracked Moody’s central expectations, if financing risks remained low, and if there was slow but durable pick-up in growth,” Packirisamy said. “A shift to stable outlook would be consistent with a gradual reduction in South Africa’s primary deficit and a stabilisation in debt ratio to below 90 percent.”