S&P downgrades SA’s local debt to junk, Moody’s places it on review for downgrade

Standard & Poor’s has downgraded South Africa’s local currency debt to junk and lowered its rating on debt denominated in foreign currency to BB from BB+ while changing its outlook on both the nation’s foreign and local currency ratings to stable.

Moody’s has placed South Africa’s local currency debt on review for downgrade citing “a series of recent developments which suggest that South Africa’s economic and fiscal challenges are more pronounced than Moody’s had previously assumed. Growth prospects are weaker and material budgetary revenue shortfalls have emerged alongside increased spending pressures. Altogether, these promise a faster and larger rise in government debt-to-GDP than previously expected”.

Moody’s says the review will allow it to “assess the South African authorities’ willingness and ability to respond to these rising pressures through growth-supportive fiscal adjustments that raise revenues and contain expenditures; structural economic reforms that ease domestic bottlenecks to growth; and improvements to SOE governance that contain contingent liabilities. The review period may not conclude until the size and the composition of the 2018 budget is known next February. This will also allow Moody’s to assess the policy implications of political developments during the review period and the likelihood of pressures on South Africa’s key policymaking institutions persisting”.

Fitch on Thursday kept South Africa at sub-investment grade for its local currency credit rating.

Moody’s decision saved South Africa from being booted out of the Citigroup World Government Bond Index  which could have seen foreign outflows from South Africa of between 10-14bn dollars.

The rand fell to 14.14 to the dollar at 11:30pm. It was trading at 13.87 just prior to S&P’s announcement.

S&P attributed the downgrade to the following:

  • Weak GDP growth leading to further deterioration of South Africa’s public finances beyond its previous expectations.
  • Expectation that government will attempt to introduce offsetting measures in an effort to improve budgetary outcomes, but these may not be strong enough to stabilise public finances, and may weaken economic growth further in the near term.
DescriptionS&PFitchMoody’s (S&P equivalent)
Foreign currency international scale ratingBBBB+BBB-
OutlookStableStableReview for downgrade
RankingSub-investmentSub-investmentInvestment
Local currency international scale ratingBB+BB+BBB-
OutlookStableStableReview for downgrade
RankingSub-investmentSub-investmentInvestment
Date of last rating action24th November 201723th November 201724th November 2017

In response to the rating agencies’ decisions the CEO Initiative said: “South Africa’s already fragile economic growth prospects and high levels of unemployment have been dealt another significant blow following Standard & Poor’s downgrade of the country’s government debt denominated in local currency to sub-investment grade, and debt denominated in foreign currency to BB from BB+.

“Two of the three major ratings agencies now have South Africa’s foreign and local currency government debt classified as so-called ‘junk’ with only Moody’s retaining their local currency rating at the lowest level of investment grade, and placing the country’s credit on review for a downgrade. This makes it more expensive for our government to borrow money, and it increases the amount of the government budget that will be spent on interest. Importantly: it reduces the money available for housing, education, healthcare and social grants.

“While this downgrade does not cause South Africa’s government debt to be excluded from the World Government Bond Index, it will likely lead to capital outflows at a time when our country needs it most. It is especially concerning as the local currency downgrade affects approximately 90% of the government’s debt, of which an estimated 40% is currently held by foreigners who have invested in our country.

“This downgrade is a response to the mismanagement of government finances as evidenced in the sharply rising trajectory of the levels of government debt and fiscal deficits highlighted in the October Medium-Term Budget Policy Statement (MTBPS).

“Unfortunately, this action – combined with the downgrades already suffered earlier this year and a low-growth economic environment – will put more strain on already low levels of business and consumer confidence, and mean that the welfare of millions of ordinary South Africans is yet again significantly disadvantaged”.


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