Economy reels under new blows
As firms batten down, citing ‘force majeure’, agency turns screw with downgrade
● One week into the lockdown and SA has lost another round in the ratings war with Fitch downgrading SA’s rating on Friday afternoon to take it further into junk territory.
The decision by Fitch follows a week after Moody’s became the last of the three big ratings agencies to junk SA.
Fitch had already cut SA’s rating to one notch below investment grade last year and the latest downgrade takes it two notches down, in line with S&P Global Ratings. Fitch also kept a negative outlook on the rating, indicating that further downgrades could follow in the next 12 to 18 months.
The ratings agency said the downgrade was the result of the lack of a clear path towards government debt stabilisation as well as the expected impact of the coronavirus shock on public finances and economic growth.
But in a statement on Friday evening, finance minister Tito Mboweni said the government was addressing and minimising the impact of the virus and implementing measures to improve economic growth and set government finances on a sustainable trajectory.
The rand broke through R19 to the dollar on the Fitch news, capping a bleak weak in which the currency breached R18/$ for the first time following the Moody’s decision, amid the turmoil in the global markets that continues as the impact of the Covid-19 pandemic on global economies becomes ever more severe.
The downgrades will make it more costly for the government to borrow on the markets at a time when its borrowing requirements are expected to jump in an economy headed into deep recession, with tax revenues plummeting.
The ratings agencies’ decisions came after a turbulent two weeks in which bond yields spiked and the government bond market almost froze as investors fled from risk, forcing the Reserve Bank to intervene to stabilise the market with liquidity measures.
But as Covid-19 cases in SA continue to climb, it emerged yesterday that the country is in talks with the New Development Bank (NDB, also called the Brics bank) on a $1bn (R18.8bn) loan to provide the government with funds to combat the health emergency.
This comes after the NDB on Thursday raised 5-billion renminbi (R13.4bn) on the Chinese and international bond markets, in the first renminbi-denominated coronavirus combating bond to be issued by a multilateral development bank in China.
The NDB has already approved a $1bn loan to China and, as one of the five member countries, SA has an equal entitlement.
A loan from the NDB would come at interest rates which would be as much as 200 basis points cheaper than SA’s government could get in international bond markets, because the NDB has an AA+ credit rating, compared to SA’s subinvestment-grade BB.
NDB vice-president and CFO Leslie Maasdorp said: “The NDB is fully committed to supporting our member countries during this period of crisis to fight the spread of Covid-19 and stands ready to provide the necessary financing to this objective.”
Financing from multilateral banks such as the NDB is likely to become necessary as SA’s budget deficit spikes on very weak tax collections, and bond market turmoil makes it more difficult and more costly for the government to borrow on the market.
Mboweni said last weekend that SA would not be “ideological” about turning to the NDB, International Monetary Fund (IMF) and World Bank for funding for health-related expenditure.
The Institute for International Finance this week said: “We believe it is time for SA to turn to multilaterals for support,” adding that an IMF programme could bring much-needed funding and help shore up investor confidence.
In an alarming report on Thursday, the institute said the Covid-19 shock had resulted in a pronounced sudden stop in capital flows to emerging markets, with its daily tracking of nonresident portfolio flows pointing to a first-quarter emergingmarket outflow that was the largest yet, including at the worst points of the global financial
The severe fallout for SA’s economy and its corporate sector is becoming ever more clear
crisis.
And though SA’s bond markets briefly strengthened after last Friday’s Moody’s downgrade, sizeable capital outflow is expected from the bond market after the world government bond index is rebalanced at the end of April to exclude SA, which is rated subinvestment (junk) grade by all major ratings agencies.
With economists slashing global growth forecasts on the likelihood of longer and more widespread lockdowns as the world works to combat the pandemic, South African economists have continued to revise down their numbers.
RMB Morgan Stanley economist Andrea Masia this week estimated the South African economy will contract by 4.7% in 2020, but said in the “bear case” the contraction could be as deep as 5.9%.
BNP Paribas senior economist Jeff Schultz expects the economy to contract by 4%.
The severe fallout of Covid-19 for SA’s economy and its corporate sector is becoming ever more clear as a slew of companies say they can no longer predict their earnings for this year, with some declaring “force majeure”, saying they are unable to meet their commitments to lenders and suppliers due to forces beyond their control.