What do the latest downgrades mean?

Last Friday, ratings agencies Moody’s and Fitch downgraded SA’s sovereign investment rating by a further notch into junk territory whilst maintaining a negative outlook. By contrast S&P Global Ratings maintained their previous rating which included a stable outlook.

The reaction from business, economists and even the government has been stark.  Finance Minister, Tito Mboweni issued the following statement:

The downgrades will not only have immediate implications for our borrowing costs, they will also constrain our fiscal framework.   There is an urgent need for government and its social partners to work together to ensure the sanctity of the fiscal framework and implement much needed structural reform to avoid further harm to our sovereign rating”

Stanlib chief economist, Kevin Lings, had this to say:

The downgrades reflect significant and sustained deterioration in the SA economy and government finance. Under these circumstances it is critical that the Feb 2021 national budget demonstrates a clear move towards fiscal discipline, but also more efficient government spending”.

North West University economist Prof Raymond Parsons added:

“There is a credibility gap on the part of the agencies around whether economic reform and fiscal consolidation plans will be adequately implemented.”The latter comment is key.  Clearly the ratings agencies do not have the confidence that government can institute economic reforms as well as fiscal consolidation (a fancy economic phrase meaning, essentially, reducing debt).

Business has urged government to introduce urgent reform but, given the current political landscape, has it the ability to do so?  SAA has not been abandoned, quite the reverse in fact, with more bail outs to come.  Restructuring at the SABC, in the form of retrenchments within a salary bloated workforce, are being met with stiff resistance.  Even the government’s declared policy of a freeze on public service wages is going to be difficult to implement without confrontation with the unions.

South Africa’s debt to GDP ratio is forecast to be 93% by the end of the 2023/24 fiscal year.  Rating agencies believe this is more likely to be 110% by that time.

Clearly the outlook is grim and we should expect increasing unemployment, with all the social ills that it brings, as well as higher taxes.

Whether or not we are going to face the dreaded fiscal cliff in the foreseeable future depends largely on how government is able to implement the much- needed reforms.

Are there any positives to cling to in the current situation?   Kevin Lings has this to say:

“Bright spots include SA’s exchange rate flexibility, credible monetary policy, a well-capitalised and regulated financial sector, deep capital markets and moderate external debt”. But, he says: “ there is no substitute for significant economic growth accompanied by job creation”

Old Mutual’s chief economist Johann Els commented, saying he was not sure if the downgrade would lead to significant rise in borrowing costs elevating the real yield on government debt as the ratings were already on sub-investment.

“I’m not sure if this will add further because the global economy is recovering due to Joe Biden’s victory in the US election and hopes for the Covid-19 vaccine, pushing a risk on trade into emerging markets. Our medium-term outlook is slowly improving”.

Despite all the doom and gloom speculation, since the downgrade, the Rand has not only held steady but strengthened against the USD by nearly 1%.   The JSE Allshare is over 2% better since the weekend.   Of course, this is mainly due to external factors, which may be temporary but so far anyway we have yet to see any negative impact.

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