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Moody's downgrades South Africa to 'junk' status

Picture: Mike Segar/Reuters/African News Agency (ANA)

Picture: Mike Segar/Reuters/African News Agency (ANA)

Published Mar 28, 2020


JOHANNESBURG - Moody’s downgraded South Africa’s sovereign credit rating to “junk” status on Friday, heaping more misery on an economy already in recession and now staring down the barrel of a steep contraction over the global coronavirus pandemic.

The ratings firm downgraded the rating one notch to ‘Ba1’ from ‘Baa3’ and maintained a negative outlook, meaning another downgrade could follow if the economy performs worse or government debt rises faster than expected.

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South Africa’s finance ministry said the downgrade would add to prevailing financial market stress.

Moody’s said the main driver behind the downgrade was “the continuing deterioration in fiscal strength and structurally very weak growth”.

“The unprecedented deterioration in the global economic outlook caused by the rapid spread of the coronavirus outbreak will exacerbate the South Africa’s economic and fiscal challenges and will complicate the emergence of effective policy responses,” it added.

The majority of analysts polled by Reuters this week had predicted the downgrade.

The agency is the last of the big three agencies to downgrade Africa’s most industrialised economy to sub-investment grade, after S&P Global and Fitch moved in 2017.

Moody’s left South Africa on the brink of junk in November after it revised the outlook on its rating to negative following a bleak mid-term budget.

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An annual budget in February showed a further worsening of the fiscal picture.

Having a junk rating from all three agencies typically increases a government’s cost of borrowing by raising the premium that investors demand to hold its debt.

The latest downgrade will see South Africa kicked out of the benchmark World Government Bond Index (WGBI) of local-currency debt, triggering up to $11 billion of forced selling, analysts estimate.

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However, one factor that could make the reaction more muted when markets open on Monday is that a rebalancing of the WGBI had been postponed until the end of April, potentially delaying some selling by “passive” funds tracking the index. 


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