Moody's and Fitch both cut SA further into junk on Covid-19 economic shock, rising debt

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Global rating agencies Fitch and Moody's both downgraded South Africa's sovereign credit rating further into junk on Friday evening, citing a combination of SA's weakening fiscal position, rising government debt and the economic shock triggered by the Covid-19 pandemic.

A majority of respondents to Bloomberg survey had expected both Fitch and Moody's to keep SA's credit ratings unchanged. 

One slight piece of good news was that the third major global ratings agency, S&P, chose to keep SA's sovereign credit rating assessment unchanged. 

All three agencies already assessed SA's debt at below investment grade ahead of the announcements on Friday evening. But the further downgrades mean that SA's borrowing costs may rise.  

In its announcement on Friday evening, Fitch said it had lowered the rating of SA's long-term foreign-currency debt to 'BB-' from 'BB', with a negative outlook. 

'BB-' is the third rung of sub-investment grade or 'junk' according to Fitch's rating hierarchy. 

"The pandemic has severely hit South Africa's economic growth performance, and GDP is expected to remain below 2019 levels even in 2022," said Fitch in a statement.

"A particularly tight lockdown in the second quarter, combined with the broader global and domestic fall-out of the pandemic, led to a sharp fall in output, but GDP had already been contracting in quarter-on-quarter terms since 3Q19."

Moody's, meanwhile, said that the economic shock of the pandemic has worsened SA's debt burden while also intensifying the country's economic challenges and social obstacles to economic reforms. 

The group changed its assessment of SA's long-term foreign-currency and local-currency issuer ratings to Ba2 from Ba1, with a negative outlook. Ba2 is the second rung of junk, according to the group's credit rating scale. 

No change for S&P

Also on Friday evening S&P chose to keep SA's sovereign credit rating assessment unchanged. 

The group affirmed its long-term foreign currency rating for SA at 'BB-' and its long-term local currency rating at 'BB', both with a stable outlook.

S&P said that while the lockdowns associated with combating the Covid-19 pandemic had plunged South Africa into its "sharpest quarterly economic contraction" in the second-quarter of the year, it expects a return to positive annual growth alongside slow fiscal consolidation in 2021-2023.

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