Downgrade in March ‘is more likely now’

The cut to SA’s growth forecast by Moody’s Investors Service in the wake of the coronavirus is intensifying the pressure on SA to hold on to its last investmentgrade credit rating.

Moody’s, the last credit ratings agency to hold SA debt at investment grade, lowered its growth forecast for SA for the second time in less than a month on Friday. The move came as it made cuts across the Group of 20 countries due to the disease’s continued global spread.

Moody’s cut its growth forecast for 2020 to 0.4% from 0.7%, a decision that is “definitely negative for the ratings outlook”, said PwC economist Christie Viljoen. It could cause Moody’s to downgrade SA at its next review on March 27 rather than wait until later this year.

After February’s budget, in which the government outlined steps to rein in expenditure, good arguments were to be made for the likelihood of Moody’s delaying a decision.

“They have always been very lenient with us compared with the other ratings agencies,” said Viljoen.

“But with this kind of a growth forecast it increases the pressure significantly. It’s very realistic to say that, at the end of the month, when they bring out that assessment that we could see a downgrade,” he added.

Though steps to save R160bn on public sector wages were announced in the budget as part of R261bn in cuts to department budget baselines, SA’s budget deficit will still rise to 6.8% of GDP in 2020/2021, while its debt will soar to 71.6% of GDP in 2022/2023.

As tax revenue forecasts are tied to economic growth, Moody’s revisions will show more pressure on tax revenue, the budget deficit and government debt, Viljoen said.

“It’s definitely something that counts against us,” he said.

The virus, which broke out in China, has wreaked havoc on global markets as fears over supply chain disruptions and negative effects to global growth intensify. SA has confirmed its third case of the virus.

The economic effects pose a risk to the Treasury’s forecasts for growth, which it has pencilled in at 0.9% for 2020, well above Moody’s revised figure.

Growing fears about the economic fallout of the virus come as Stats SA confirmed last week that the economy slid into recession in the last quarter of 2019, shrinking by 1.4%.

Moody’s is now expecting the global economy to grow 2.1%, down 0.3 percentage points from its previous forecast. It cut its forecast for China, SA’s largest trading partner, to 4.8% from its previous estimate of 5.2%.