Treasury on Moody's SA credit rating downgrade: 'It could not have come at a worse time'

Government has noted the decision by Moody’s to downgrade South Africa’s long term foreign and local currency debt ratings to ‘Ba1’ from ‘Baa3’ and maintain the negative outlook.

South Africa’s credit ratings by Moody’s are now one notch below investment grade.

According to Moody’s, the following are key drivers behind the downgrade:

• Structurally very weak growth and constrained capacity to stimulate the economy.
• Inexorable rise in government debt over the medium term.

"The negative outlook reflects the risk that economic growth will prove even weaker and the debt burden will rise even faster and further than currently expected, weakening debt affordability and potentially, access to funding," said Treasure in a statement. 

"The decision by Moody’s could not have come at a worse time."

 South Africa, like many other countries, is seized with containing the outbreak of the coronavirus (COVID-19). 

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The impact of COVID-19 is felt across various sectors of the economy including the financial markets which experienced a significant sell-off in equities, bonds and exchange rates as investors retreated to safe-haven securities amid the uncertainty," said Treasure in its statement. 

"The sovereign downgrade will further add to the prevailing financial market stress. These two events will truly test South African financial markets."

The downgrade will see South Africa being excluded from the FTSE World Government Bond Index (WGBI) and the government bond market will experience further capital outflows as fund managers with investment-grade mandates will be forced to sell South African government bonds, said Treasury. 

"Non-residents currently hold approximately 37% (R800 billion) of the total domestic government bonds and the number is expected t substantially decline with the combined impact of COVID-19 and the downgrade." 

It added: "The interest rate for government, households and the broader economy is also expected to increase as a result."

Treasury concluded: "While some market participants argue that the impact of a sovereign downgrade has already been priced in, it is difficult to stipulate with certainty the extent."

“Therefore, to say we are not concerned and trembling in our boots about what might be in the coming weeks and months is an understatement,” Minister of Finance, Tito Mboweni said.

Treasury noted that government remains committed to implementing structural economic reforms to address the weak economic growth, constrained fiscus, and the ailing state-owned companies. 

“It is with a heavy heart to note that all three major credit ratings agencies currently rate South Africa at sub-investment grade. However, every crisis presents an opportunity. The opportunity we have today is to unite and work together to address our challenges. We as a people have overcome insurmountable challenges in the past and we can still overcome. We shall rise. We have to rise. We owe it to ourselves,” Mboweni said.