Moody’s junks SA at “worst time”

Late on Friday evening  Moody’s became the last of the rating companies to cut South Africa’s sovereign credit rating to junk with a negative outlook citing continued deterioration in government’s fiscal strength and weak economic growth. 

“Moody’s does not expect current policy settings to address effectively. Both outcomes speak to weaker economic and fiscal policy effectiveness than Moody’s previously assumed,” Moody’s said in a statement released on Friday evening.

“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,” it said. 

The announcement comes as SA concludes its first day of a nationwide lockdown which has seen almost all economic and productive activity, except for the functioning of essential services, slow down or completely shut down as citizens remain at home to stop the spread of the novel coronavirus known as Covid-19. 

When it rains it pours  

In a statement, the National Treasury said that Moody’s decision “could not have come at a “worse time” as the country continues its battle with the Covid-19 virus which has infected over 1170 people and killed one person since the first case was announced three weeks ago. 

Treasury said that the impact of the virus has crossed over to multiple sectors in the economy including the financial markets which have experienced great volatility and a high sell-offs in equities as investors move their money to safe-haven securities. 

“The sovereign downgrade will only add to the prevailing financial market stress,” said Treasury”. “These two events will truly test South African financial markets”. 

The announcement is significant because of it signals SA’s exit from the FTSE World Government Bond Index which requires a sovereign to have at least one investment-grade rating by one of the credit rating agencies. S&P and Fitch had already junked SA’s long-term and local currency debt ratings in 2017.

Read: Junk or no Junk SA will remain on key government bond index

Global fund managers who have investment-grade mandates will be forced to sell-off their South African bonds by the end of April, the new date in which the WGBI will rebalance its indices due to prevailing global market conditions marked by unusual illiquidity and volatility. 

Foreigners hold 37% or R800 billion in the countries total domestic government bonds which are expected to “substantially decline with the impact of Covid-19 and the downgrade”, 

This is a developing story