Moody’s Investor Services Downgrades South Africa’s Sovereign Credit Rating

The decision by investor services agency Moody’s to cut South Africa’s sovereign credit rating to sub-investment grade – although not unexpected – comes at an unfortunate time, when the country is working to contain the human cost of the Covid-19 pandemic and the resulting economic impact.

The cost of capital will structurally increase, not only for government, but for all people and businesses. The South African economy was experiencing recessionary-like conditions even before the impact of Covid-19 pandemic and its citizens do not save enough for the country to finance its own development needs. South Africa is reliant on borrowings from domestic and international markets for the funds needed by government for services and investment. This is why ratings are important.

While South Africa’s government bonds already trade at levels of non-investment grade countries – meaning this downgrade has largely been priced in by financial markets – the cost of credit for all South Africans will be structurally higher than it otherwise would have been. The impact of this cost will be seen in future budgets and government spending.

The credit ratings of banks are linked to that of the country, so the ratings of our banks will be automatically downgraded by Moody’s. The higher cost of capital will hamper the feasibility of sustainable infrastructure projects and commercial business ventures that are necessary for higher levels of inclusive economic growth

This downgrade happens when the country is uniting to confront the Covid-19 pandemic. Once we have defeated the pandemic, South Africa needs to use this moment of unity and sense of purpose to take hard decisions about the structural reform needed to stabilise government finances and to create an environment for investment and higher levels of inclusive economic growth. The country is at the start of a hard journey of many years to restore our government finances and to overcome the unemployment, poverty and inequality that continues to divide us as a nation. The first steps include:

• Resolving the financial and operational crises at Eskom and diversifying the power supply. Eskom must use the easing of demand caused by the lockdown to further strengthen its generation and transmission networks.
• Government must stop any further bail outs of non-strategic and failing state-owned enterprises and redirect the funds to investment in productive infrastructure and for social development. The Covid-19 pandemic has shown that the country desperately needs to repair its health and water infrastructure, among others.
• Improving productivity, efficiency and accountability in the civil service and substantially reducing the public sector wage bill and redundant government programmes.
• Increase the pace of reforms that reduce the cost of doing business, especially for small enterprises. The Covid-19 pandemic has shown that there are opportunities for import substitution in the healthcare industry, among others.

The economy is expected to contract substantially this year. We must acknowledge that our past failures to carry out economic reforms means that government finances are weak at a time when elsewhere in the world large fiscal stimulus packages are being enacted.
The banking industry is ready to do its part to help our country overcome its challenges. As South African Reserve Bank (SARB) Deputy Governor Kuben Naidoo commented: “Our banking system remains safe, sound and resilient and can play a role in both the shorter term economic crisis, but also in the longer term, to support investment and growth.”