South Africa seems to be teetering on the brink of another downgrade of its sovereign credit rating to so-called “junk” after Moody’s adjusted its economic growth outlook for the country down by 0.3%.
Following an earlier statement that the he local economy is expected to grow by 1% in 2020, the ratings agency said yesterday that sluggish growth was expected to further slow it to 0.7%.
Reasons for the downward adjustment are the recent outages by power utility Eskom, and diminishing interest in South African stocks and bonds among investors.
Yesterday, as Moody’s announcement spread through global markets, the local currency breached the R15 mark, falling to R15.0205 against the US dollar.
It later recovered to R14.9845.
It was the rand’s weakest position since February 10 and marks a 7% depreciation since 2019.
Among 23 other emerging market economies it competes against, the rand is the 2nd worst performer.
Fears now support the notion that South Africa risks losing its last investment grade rating.
In 2017 S&P Global and Fitch “junked” South Africa’s sovereign rating after former president Jacob Zuma fired then finance minister Nhlanhla Nene, temporarily replacing him with “weekend special” Des van Rooyen before investment pressure forced Zuma’s hand, leading to Pravin Gordhan taking over at Treasury.
Since then the government has had to work hard to hang onto its last above-grade investment rating.
Should Tito Mboweni’s February budget speech fail to persuade Moody’s that the government is capably intent on turning loss-making parastatals such as Eskom around and cutting government spending, preferably by slashing the civil service wage bill, South Africa could receive its third junk strike by March.
It means the country will be removed from the global Citibank Index, a crucial position to have for attracting foreign investment to government bonds.
According to the Reserve Bank it means that as much as R120 billion in investments could be withdrawn from the country.
But a credit official from Investec whom FTW spoke to over the weekend said all the talk about a downgrade was “alarmist”.
Quoting former Investec CEO Stephen Koseff, she said: “There’s nothing like a good crisis to get things going.”
She added that some economists speculated that another downgrade had already been priced into markets.
Others, however, feel that another junk rating could be a tipping point for what seems like a tanking economy. – Eugene Goddard
