Downgrades to raise South Africa’s borrowing costs
JOHANNESBURG: South Africa’s finance ministry said credit rating downgrades by Moody’s and Fitch would increase the country’s borrowing costs and limit its fiscal options.
“The decision of Fitch and Moody’s (…) is painful,” said Tito Mboweni, Minister of Finance, in a press release.
There is an urgent need for the government to implement structural economic reforms to avoid further damage to the country’s sovereign rating, he said.
Credit rating agencies Fitch and Moody’s lowered South Africa’s sovereign ratings deeper into junk territory on Friday night due to rising debt and a likely weakening in its fiscal position. S&P Global confirmed its rating.
With the coronavirus disease pandemic worsening, South Africa’s tax revenue is shrinking as the economy shrinks, while spending to contain the spread of the virus and cushion its impact on the poor has increased .
In last month’s midterm budget, the National Treasury projected that South Africa would run a budget deficit of over 15% of GDP in the fiscal year ending March 2021, the highest in the post-apartheid history.
Africa’s most industrialized country currently has a debt of nearly 4 trillion rand ($260 billion), or 63.3% of GDP. Its debt-to-GDP ratio is expected to reach over 90% in three years, the worst such increase in the world.
With the ratings downgrade, the cost of borrowing and debt servicing will rise and the government will either have to cut social spending or tax more, the National Treasury has said, at a time when almost a third of the population is Unemployed.
“Continued rating downgrades will translate into unaffordable debt costs, deteriorating asset values (such as pensions, other savings and property) and reduced disposable income for many,” he said. he said, referring to the impact on South Africans.
Market reaction to the downgrades, for now, should be muted, said Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Bank.
“The (government’s) reform momentum looks more positive in the short term,” she said, but warned it was fraught with pitfalls.