Rating agency Fitch sunk South Africa deeper into junk status on Friday, a move which saw the rand breach R19 to the dollar.
SA’s ratings were downgraded one notch further into sub-investment grade with Fitch blaming the country’s “lack of a clear path towards government debt stabilisation as well as the expected impact of the Covid-19 shock on public finances and growth”.
The negative outlook, “reflects the prospect of further significant upside pressure on government debt and additional downside risks associated with the global shock,” it added.
The agency forecasts that the country’s economy will contract by 3.8% in 2020 only recovering slightly to 1.7% in 2021.
“The contraction primarily reflects a 21-day lockdown, during which large parts of the economy, including most mines and manufacturing plants, have ceased operating,” saying even if the lockdown is not extended many sectors will be disrupted and global demand will not recover any time soon.
Fitch’s downgrade comes a week after Moody’s snuffed out SA’s last investment-grade rating citing continued deterioration to public finances, the slow pace of reform, rising public debt, and an inability by government to stimulate the economy.
Debt surpasses the median
It further stated that constrained electricity supply and the impact of the Covid-19 pandemic would only exacerbate the country’s weak economic climate.
“In the midst of the prevailing financial market stress emanating from Covid-19 and credit ratings downgrades by Moody’s and Fitch, the government reiterates its commitment to implement structural economic reforms to address the weak economic growth, constrained fiscus and ailing state-owned companies,” said the National Treasury in a statement noting the Fitch downgrade.
Fitch said the country would be battling the global Covid-19 crisis when public finances are in a poor position. It estimates that fiscal debt will surge to 11.5% of GDP this year from 6.6% in 2019. It further expects government debt to rise from 64% of GDP in 2019 to 80.2% in the 2021/2022 financial year, “well above the 2019 ‘BB’ category median of 46.5%”.
“To assure all South Africans, government is seized with addressing and minimising the impact of Covid-19, implementing measures to improve economic growth and setting government finances on a sustainable trajectory. This work requires close collaboration and coordination across various sectors of the economy,” Finance Minister Tito Mboweni, said.
Treasury said a positive was Fitch’s acknowledgement of the country’s resilience to external shocks even as its spirals into junk and global financial markets are aflame.
The agency said it did not “expect acute problems in fiscal financing, partly reflecting the unusually long-average maturity of government securities (15 years) and the low share of foreign-currency debt in total debt (10%)”.