South Africa fell deeper into junk territory after Moody’s Investors Service joined Fitch Ratings in lowering the country’s credit ratings on Friday.
Moody’s cut the nation’s foreign- and local-currency ratings to Ba2, two levels below investment grade, from Ba1. The outlook remains negative. Fitch cut the nation’s foreign- and local-currency ratings to BB-, three levels below investment grade, from BB, also with a negative outlook.
“The key driver behind the rating downgrade to Ba2 is the further expected weakening in South Africa’s fiscal strength over the medium term,” Moody’s said in a statement. Fitch said in a separate release that “the pandemic has severely hit South Africa’s economic growth performance, and GDP is expected to remain below 2019 levels even in 2022.”
Only five of 23 economists surveyed by Bloomberg predicted Moody’s to cut the rating.
The coronavirus pandemic exacerbated the deterioration of South Africa’s government finances because it weighed on revenue collection, raised the cost of borrowing and pushed the economy into its longest recession in almost three decades.
Finance Minister Tito Mboweni’s medium-term budget last month showed plans to pare the government salary bill, which has surged 51% since 2008, as part of an effort to start bringing the government debt trajectory down after 2026.
The proposed wage freeze risks a backlash from politically influential labor groups that are already in a legal battle with the government to honor an agreed pay deal. If state salaries can’t be cut, there’s limited room for offsetting measures in other expenditure areas.
“A recovery is on the way as the lockdown was gradually eased during the third quarter and we expect GDP will contract by 7.3% in 2020,” Fitch said. South Africa’s government debt affordability, measured as the portion of revenue needed to cover interest payments, will deteriorate to 25% in the medium term, according to Moody’s.
S&P on Friday kept its assessment of South Africa’s foreign-currency debt three levels below investment grade, with a stable outlook.