SA downgrade sets scene for turmoil
• Tito Mboweni warns that Moody’s action will add to the prevailing financial market stress
SA’s financial markets, hit by dislocations that prompted Reserve Bank intervention, could have a shaky start on Monday after Moody’s Investors Service stripped the country of its last remaining investmentgrade rating.
In his initial reaction, finance minister Tito said on Friday that the Mboweni’ Moodys action “will further add to the prevailing financial market stress”.
The rand, which fell 1.7% before the Moody’s decision, may trade weaker than R18/$ for the first time, according to Peregrine Treasury Solutions.
Analysts said long-term prospects were less clear.
With Moody’s maintaining a negative outlook, indicating that downgrades could be in store as a result of weak growth and a worsening debt burden, the action leaves SA’s government to navigate tumultuous months ahead as it seeks to deal with an economic contraction that is likely to add to the country’s near-30% unemployment rate.
SA’s ability to entice buyers for its debt faces an early test on Tuesday when the National Treasury auctions about R4.5bn of bonds in an environment in which sellers are struggling to find buyers. Foreign investors, who hold about 37%, sold a net R48bn of SA bonds in 2020 so far. The downgrade means the country may be saddled with higher borrowing costs, constraining its ability to spend on key social services such as health and education.
On Friday, Moody’s downgraded the country’s long-term foreign- and local-currency debt ratings to Ba1 from Baa3, citing SA’s deteriorating fiscal strength and structurally “very weak growth”. The agency said progress on structural reform and efforts to stabilise electricity supply had been limited.
The “unprecedented” effect of the virus’s global spread would worsen SA’s economic and fiscal challenge.
Moody’s decision left SA in a “scary” position, said Johann Els, chief economist at Old Mutual Investment Group, who expects the economy to shrink 3.5% in 2020 and shed more than a million jobs. At the height of the global financial crisis, in 2009, SA’s GDP fell 1.5% and the economy lost 860,000 jobs.
Though some analysts believed markets had priced in the downgrade, it came at a time of extreme volatility, which increased liquidity pressures with local and international investors having fled to safehaven assets. SA 10-year yields, which move inversely to the price, surged to new records last week. The R2030 was at 11.65%