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South Africa suffered another blow this week when ratings agency Moody's changed the outlook of the country's credit rating from stable to negative and some economists are of the view a downgrade to junk status is likely within the next year.
Moody's is the only ratings agency which has SA ranked at investment grade – or Baa3 for long-term foreign-currency and local-currency debt.
In its review, released on Friday, the ratings agency said the decision to downgrade the outlook from stable to negative reflects the "material risk" that the government will not succeed in stopping the deterioration of its finances, through measures to boost economic growth and fiscal consolidation.
"In Moody's view, the combination of low potential growth and high and inexorably rising debt as outlined in the medium-term budget policy statement published this week would not be consistent with a Baa3 rating.
"The current rating rests on the government's ability to quickly develop a credible strategy to halt and ultimately reverse the rise in debt," the ratings agency said.
The rand however took the news in its stride, Bianca Botes of Peregrine Treasury Solutions noted in a snap market comment issued on Saturday.
"[The rand is] holding steady at levels of around R15.02/$," Botes commented. The rand was trading at R15.03/$ just after 13:00 on Saturday, when the market update was issued.
Botes warned that a further downgrade to junk status within the next year should still be considered.
These views were echoed by Stanlib chief economist Kevin Lings, who tweeted that Moody's review was "scathing".
"Moody's review of SA government finances is scathing. Moody's thinks that there is a material risk that government will not succeed in stopping the fiscal deterioration. They are very critical of government's ability to implement reforms. Expect a full downgrade to junk next year," Lings said.
Citi Bank economist Gina Schoeman on Saturday morning tweeted that if SA is relegated to junk status, the journey to achieve an investment grade rating again would almost be "inconceivable".
"Don't take prospects of a future Moody's downgrade lightly; if it coincides with S&P and Fitch taking us further into junk status then the effort to move 2 or more notches back to investment grade is so immense it's almost inconceivable," she warned.
The ratings agency said that a credit rating upgrade is unlikely. Moody's said it will likely downgrade the credit rating if the country's economic and fiscal strength continue to weaken.
Furthermore, the outlook would only change back to stable if it can be shown that government would stabilise debt over the medium term. This can be done by reining in expenditure, improving tax compliance and lifting potential economic growth.
According to the medium-term budget policy statement, SA's debt-to-GDP ratio is quickly approaching 70%. The document shows that debt-to-GDP ratio is currently 61% and will grow to above 71% of GDP by 2022.
Earlier this week, Mboweni told journalists at a briefing ahead of his speech on the medium-term budget policy statement, that debt levels are reaching "unsustainable" levels. "Once the debt-to-GDP breaches the 60% level, we should be concerned. Ideally our debt-to-GDP should be around 30% or lower. The [Reserve Bank] Governor prefers GDP," Mboweni said.
He warned that SA would have to approach the International Monetary Fund for a bailout if the debt-to-GDP ratio reaches 100%.
Moody's however is of the view that the likelihood of government reducing the debt-to-GDP ratio has "fallen materially".
"The government debt burden has risen further than was expected a year ago and will rise still more in the coming years," Moody's said.
Pressures on the fiscal position are being exacerbated by low growth too, the ratings agency said.
Resistance to reforms
Treasury revised down economic growth from 1.5% to 0.5%. Moody's commented that this shows resistance by key stakeholders are limiting government's room to adopt and implement structural reforms to lift growth.
"The government has promoted a number of initiatives in response to these long-diagnosed issues.
"However, its ability to implement those initiatives in a way which generates broadly-based sustainable growth has faced obstacles in part from outstanding vested interests, in part from the social and political challenge of imposing measures that are initially likely to be detrimental for parts of the population," Moody's said.
"The negative outlook signals in part Moody's rising concern that the government will not find the political capital to implement the range of measures it intends, and that its plans will be largely ineffective in lifting growth."
Subsequently, Moody's also revised down its growth projections for the medium term down from a range of 2.5% to 3%, to a range of 1% to 1.5%.
In terms of fiscal consolidation measures, the ratings agency pointed out there is little room for government to cut expenditure – given that the above-inflation agreement for public sector wages that ends in March 2021, as well as continued transfers to financially troubled state-owned enterprises.
Moody's expects tax revenue to underperform budget targets in the near term, but improvements are likely in the medium term if the South African Revenue Service's efforts to improve tax compliance materialise.
No credible plan
Moody's said it will be keeping watch of government's progress in delivering the fiscal adjustments identified in the medium-term budget policy statement, as well as addressing corruption and "financially weak" state-owned enterprises, particularly Eskom.
"If achieved, these should ultimately enhance business confidence and private sector investment prospects," Moody's said.
For now there appears to be no credible fiscal strategy on the table yet, the ratings agency noted.
"The development of a credible fiscal strategy to contain the rise in debt, including in the 2020 budget process and statement, will be crucial to sustain the rating at its current level," Moody's said.