Junk rating likely the least of South Africas problems – BusinessTech

As South Africa heads into a three-week lockdown that will shut down large parts of its already shrinking economy, a possible downgrade of its credit rating to junk on Friday could be the least of its problems.

Moodys Investors Service is scheduled to make an announcement at the end of the week and while it could end up taking no action, 19 of 23 economists surveyed by Bloomberg expect a negative ratings move. According to 12 respondents, the country will be cut to junk, while seven expect it to be placed on ratings watch for a downgrade, two expect it to be affirmed at current levels and two expect no statement.

Pessimism has been growing since Moodys in November cut the outlook on South African credit to negative and the February budget failed to show a debt-stabilization path.

The economy has slumped into its second recession in two years, a problem exacerbated by the coronavirus pandemic, which causes the Covid-19 respiratory disorder that has so far killed more than 17,000 people worldwide.

The Covid-19 has certainly added to the underlying economic pressures, said Thabi Leoka, an independent economist in Johannesburg. Debt seems to increase in perpetuity. This is a problem.

On Monday night, president Cyril Ramaphosa announced a lockdown that will go into effect at midnight on March 26, halting all activity except essential services. The restrictions are likely to weaken tax collections, increasing the burden on already-strained public finances. Government estimates in February showed the budget deficit as a percentage of GDP would widen to an almost three-decade high in the 12 months through March 2021.

That, and the governments debt burden, could now look even worse. The Treasury will have to reconsider its fiscal framework, Director-General Dondo Mogajane told the South African Broadcasting Corp on Tuesday.

On the growth side, the picture is hardly any better. Moodys almost halved its forecast for 2020s expansion to 0.4% on March 6, when the country had just one confirmed infection. As of Tuesday it had 554, with 302 of those in Gauteng province, the countrys economic hub, according to Health Minister Zweli Mkhize.

South Africas creditworthiness has deteriorated drastically, said George Herman, chief investment officer of Citadel Investment Services. The longer the downgrade takes, the more damage it will cause.

But while a downgrade by Moodys would leave South Africa without an investment-grade rating for the first time in 25 years and cause it to be dropped from the FTSE World Government Bond Index, the negative impact on the rand may be muted. Thats because virus-driven fears have already resulted in significant outflows, driving the currency 14% lower against the dollar in the past month.

Given that backdrop, the reality of a long-feared downgrade could even come as a relief, said Mike Schussler, chief economist at Economists.co.za. Freedom from worries about a downgrade could also free up South African monetary and fiscal policy decision makers to take decision action, he said, at a time when rules have been dumped to help keep economies alive globally.

Lumkile Mondi, an economics lecturer at the University of the Witwatersrand in Johannesburg, is the only respondent in the Bloomberg survey who expects the country will still have its investment-grade rating at Moodys at the end of 2020.

South Africa has been saved by Covid-19, which requires massive investment by the state to save lives, Mondi said. Covenants and other financial measurements have become secondary.

What Bloombergs Economist Says

President Cyril Ramaphosas swift and decisive handling of the crisis will probably stay Moodys hand for now until the extent of damage to the economy is fully understood.

Read: Will Moodys skip its ratings decision on South Africa because of the coronavirus?

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Junk rating likely the least of South Africas problems - BusinessTech