SA has three months to defend investment-grade rating

South Africa is fighting to preserve its last remaining investment-grade credit rating and avert a forced sell off of billions of rand of its debt after Moody’s Investors Services gave it just over three months to get its finances in order.

Read: Rand gains with bonds as SA dodges Moody’s downgrade

The ratings company cut the outlook of the nation’s Baa3 foreign- and local-currency assessments, both of which are one step above speculative grade, to negative. That’s after Finance Minister Tito Mboweni presented a rapidly deteriorating outlook in his medium-term budget policy statement, with gross government debt seen surging to 80.9% of gross domestic product in the 2028 fiscal year unless urgent action is taken.

Moody’s move places South Africa on the verge of a full house of junk ratings unless the government can develop a “credible fiscal strategy to contain the rise in debt” in the budget review due February, it said. The ratings affirmation allows the continent’s most-industrialised economy “a narrow window to demonstrate faster and concrete implementation of reforms,” according to the National Treasury. Economists fear the clock is running is out.

“It’s bad timing because we’re already wrapping up the year and the budget is in February, which is already a short month,” said Thabi Leoka, an economist and member of the Presidential Economic Advisory Council. “We actually don’t have time to do what we have to do,” she said.

A downgrade would see South Africa without an investment-grade ranking for the first time in 25 years. That would cause it to fall out of the FTSE World Government Bond Index, which could prompt a selloff and outflows of as much as $15 billion, according to Bank of New York Mellon Corp.

With limited scope to raise taxes in an economy forecast to grow just 0.5% for the year, the Treasury is reducing spending by a total of R50 billion by 2022 to plug the widening budget gap, but it needs to find another R150 billion of savings to achieve a target of a primary balance by 2023.

Mboweni is redoubling efforts to cut the state’s payroll costs, which make up 35.4% of national spending. The Treasury is also forging ahead with plans to split loss-making power utility Eskom into three units and hasn’t ruled out selling non-core assets or increasing private-sector participation in state-owned companies. However, it will have to reach agreements with powerful labour unions to implement the proposals.

“If there’s no meaningful action, Moody’s will have to pull the trigger,” said Elize Kruger, a senior economist at NKC African Economics.

Moody’s first came close to cutting South Africa to junk in December 2017, when it placed the country on review for a downgrade. South Africa managed to keep its Baa3 rating and was rewarded with an outlook change to stable from negative when the review was completed. While the state of public finances had since deteriorated owing to ongoing support for Eskom and other state-owned companies, Moody’s missed two of its last three scheduled rating actions. Had the company issued a warning earlier, it may have helped Mboweni in negotiating with labour groups, said Lullu Krugel, chief economist at PwC.

While Cyril Ramaphosa’s rise to power — first as leader of the ruling African National Congress and as then president of of the country — and reform agenda helped avert downgrade the first time around, his government’s inability to push through reforms threatens to do the opposite.

“If he doesn’t use these three months wisely, we’re facing another failed African country,” said Lumkile Mondi, an economics lecturer at the University of the Witwatersrand in Johannesburg.

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