South Africa cut deeper into junk by S&P as pandemic hits growth

South Africa was cut deeper into junk territory by S&P Global Ratings on Wednesday amid concern the Covid-19 pandemic will send the economy into a sharp downturn.

The ratings firm downgraded the country’s long-term foreign-currency credit rating to BB-, three notches below investment-grade, from BB. S&P said South Africa’s cost of servicing public debt will climb to about 6.5% of GDP by 2023.

Africa’s most industrialised economy is stuck in the longest downward cycle since at least World War II with business confidence at the lowest in more than two decades and almost a third of the labor force unemployed. Output is also weighed down by power-supply constraints. Eskom, which generates about 95% of South Africa’s electricity, regularly implements rolling blackouts to prevent a collapse of the national grid.

“The Covid-19 health crisis will create additional and even more substantial headwinds to GDP growth,” S&P analysts led by London-based Ravi Bhatia wrote in a report.

The downgrade casts further gloom on South Africa. Last month, the country lost its Moody’s Investment Services investment-grade credit rating more than 25 years after it was first awarded. Meantime, the rand has slumped 23% in 2020, the second-most of any major currency tracked by Bloomberg after Brazil’s real.

“Tough decisions have to be made and collaboration between government, business, labor and civil society remains vital in order to contain the spread of Covid-19 and ensure sustainable economic recovery,” South Africa’s National Treasury said in a statement in response to the rating decision. The government is “disappointed” by the move.

S&P said South Africa’s economy will probably shrink by 4.5% this year. While the government’s decision to go into a strict lockdown relatively early could limit the health impact, it’s adding to the financial hit. Even before stay-at-home orders, the central bank forecast South Africa’s economy would contract for the first calendar year since the global financial crisis in 2009.

“The broader economic fallout will be very difficult to handle,” Bhatia said.

© 2020 Bloomberg