South Africa’s National Treasury sees the downgrade of the country’s debt to junk by Moody’s Investors Service as an opportunity to fix the economy.
While the announcement, made close to midnight on March 27, is expected to further weaken the rand, the country is now “given an opportunity to do the things we are supposed to do,” Tshepiso Moahloli, acting head of asset and liability management at the Treasury, said on a call with reporters late Sunday.
Moody’s cut its assessment of South Africa’s debt to sub-investment grade, saying unreliable electricity supply, persistent weak business confidence and investment, and long-standing structural labor market rigidities continue to constrain economic growth. The coronavirus pandemic means the country is entering an expected global downturn in an economically vulnerable position.
Moody’s changed the outlook on the ratings to negative in November and wanted to see a credible strategy in the February budget for halting a deterioration in public finances. However, the spending plans presented by Finance Minister Tito Mboweni last month showed the fiscal deficit as a percentage of gross domestic product would widen to an almost three-decade high, and the economy is projected to contract for a calendar year for the first time since 2009.
“We take this downgrade as an opportunity do the right thing,” Moahloli said. “We won’t be able to offer the social and economic program that had been promised to South Africans.”
Africa’s most-industrialized economy is stuck in the longest downward cycle since at least 1945 with business confidence at a more than two-decade low and almost a third of the labor force unemployed. Output is also weighed down by insufficient power supply and delays in structural economic reforms due to political bickering within the ruling party.
“Throwing more money into the economy is insufficient and unsustainable,” Deputy Finance Minister David Masondo said. “We need to move with structural reforms.”
The Moody’s downgrade means South Africa is now assessed as junk by all three major ratings companies, after S&P Global Ratings and Fitch Ratings cut the country to sub-investment grade in 2017, and will fall out of the FTSE World Government Bond Index after April. That could prompt capital outflows and weaken the rand further.
Reserve Bank Governor Lesetja Kganyago said on the same call the central bank is “crisis ready” and will step in when needed.
“We have got the tools to deal with financial market stresses, we will not hesitate to deploy those tools in pursuance of our mandate” of financial stability, he said.
Already the central bank has announced it will buy government bonds after it saw a lack of liquidity in the market.
The bank doesn’t have a target for its bond-buying program and will sell them if it needs to drain liquidity, Kganyago said. The program “is not for the yield curve, it’s for liquidity,” he said.