Moody's cuts South Africa's credit rating to junk

Nelson Mandela Bridge in Johannesburg. (Photo by: Hoberman Collection/Universal Images Group via Getty Images)
Nelson Mandela Bridge in Johannesburg. (Photo by: Hoberman Collection/Universal Images Group via Getty Images)

Rating agency Moody's has cut South Africa's sovereign credit rating to subinvestment grade, meaning the country now has a junk rating from all three major international rating agencies. 

The downgrade comes on the same day that South Africa entered a 21-day national lockdown in an effort to slow the spread of the coronavirus pandemic. 

In a statement on Friday evening, Moody's cited the deterioration in SA's fiscal strength and "structurally very weak growth" for its decision to lower the country's rating to Ba1 from Baa3. The outlook remains negative.

Before Friday evening, Moody's was the sole major rating agency to not have downgraded SA to junk. Rival agencies Fitch and S&P both downgraded SA to junk in 2017.

The announcement on Friday evening was not unexpected. It comes after Moody's downgraded its outlook for SA's credit rating to negative in November 2019, warning of SA's growing debt-to-GDP ratio. 

Due to the downgrade, South Africa's government bonds will be excluded from the FTSE World Government Bond Index. 

Coronavirus to make economic challenges worse 

Moody's said the "unprecedented deterioration" in the global economic outlook caused by the rapid spread of the coronavirus outbreak will exacerbate the the country's economic and fiscal challenges, and "complicate the emergence of effective policy responses".

"Unreliable electricity supply, persistent weak business confidence and investment as well as long-standing structural labour market rigidities continue to constrain South Africa's economic growth.

"As a result, South Africa is entering a period of much lower global growth in an economically vulnerable position. The government's own capacity to limit the economic deterioration, in the current shock and more durably is constrained," it said.  

The rating agency added that progress on structural economic reforms had been "very limited".

"Some initiatives to improve competition and encourage job creation have progressed, but none that constitute a step-change for the economy."

"Structural issues such as labour market rigidities and uncertainty over property rights generated by the planned land reform remain unaddressed. Moreover, a strategy to stabilize electricity production has been slow to emerge and has yet to prove its effectiveness." 

South Africa is already facing record-high unemployment, while the economy slumped into its second recession in two years in the last quarter of 2019. Economist have warned that SA's GDP will decline further in the second quarter of 2020 as the full economic impact of the coronavirus becomes clear. 

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