SA one step closer to ‘junk status’ as Moody’s changes outlook to negative
The country has effectively been placed on notice, with the decision to move SA to sub-investment grade now looming over the next 12 to 18 months.
Moody’s expect the cost of serving the country’s debt to continue rising and growth to be slow.
Moody’s, the last of the big three ratings agencies to keep SA at investment grade, has kept the country at one notch above “junk”, but has changed the outlook from stable to negative.
This has left the country teetering on the fiscal brink.
Standard & Poor’s Global and Fitch both already downgraded SA to sub-investment grade about two years ago. Moody’s rates South Africa at BAA3, the last rung before sub-investment grade.
Finance Minister Tito Mboweni said this week that the pending ratings review from Moody’s Investors Service was “not looking good”, which immediately caused a selloff in the rand.
Mboweni surprised investors in his medium-term budget statement on Wednesday with how bleak the economic outlook is, with gross government debt expected to surge to 80.9% of gross domestic product in 2028 unless urgent measures are implemented.
Mboweni said the national debt was expected to balloon from R3 trillion to R4.5 trillion in the next three years.
Had Moody’s downgraded SA, as some feared was probable, there would have been enormous financial consequences for the country as it would automatically have fallen out of the FTSE World Government Bond Index. The resultant investor selloff would have caused estimated financial outflows of $15 billion, reported Bloomberg.
“The development of a credible fiscal strategy to contain the rise in debt, including in the 2020 budget process and statement, will be crucial to sustaining the rating at its current level,” Moody’s said in a statement after the JSE closed on Friday.
Moody’s had earlier twice skipped publishing a review of South Africa, and with the outlook worsening, the country is one step closer to losing its investment status.
The agency acknowledged the grim state of the country’s economy, and expressed concern about the immediate future.
Moody’s mentioned high unemployment, Eskom, inequality, and severe sociopolitical challenges.
The negative outlook means the country has about 12 to 18 months in which a downgrade could be delivered, though it could come even sooner.
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