Earlier in March, the only rating agency to still keep South Africa in the investment grade Moody's, slashed the country's GDP forecast from 0.7% to 0.4% already givin byg analysts a glimpse of what their decision on March 27th would be. Towards the end of 2019, the agency pointed the burden the State-owned entities and debt to GDP ratio pile on the public purse could be the reason for downgrades
Although most analysts in South Africa believed the wield of the effect coronavirus on global economies may swing the Moody's decision in favour of SA, the rating agency Moody's spilt the country's sovereign credit rating to sub-investment grade (junk status) from Baa3 to Ba1 raising factors such as fiscal strength and structurally very weak growth induced by inconsistent electricity supply, persistent business confidence and labour market constraints which continue to perturb economic growth.
The downgrade then shovels South Africa's government bond( worth around $11 billion-outflow) off the FTSE World Government Bond Index. Before downgrade, SA had implied probability of default of 6.63% and with the remaining rating agencies S&P keeping them at BB and Fitch Ratings at BB+ both with negative outlook. The Revenue Receiver missed collections for the financial year 2018/19 penciled a deficit of R14.6 billion after amassing up R1 287.6 billion in tax collections moreover, during the 2020 budget speech delivered by Finance Minister Tito Mboweni, the country budget deficit is set to widen and expand to 6.8% which will the highest since 1992/93 fiscal year.
The rating agency reasoned the covid19 will perniciously aggravate the country economic situation and further affirm barricades to effectiveness of policies to be implemented to address structural reforms and fiscal stability. Moody's said the "unprecedented deterioration" in the global economic outlook caused by the rapid spread of the coronavirus outbreak will exacerbate the the country's economic and fiscal challenges, and "complicate the emergence of effective policy responses".
Midway 2019, Moody's cited they'd factor the Eskom debt in their next assessment which was scheduled for July and this preceded the Power utility’s downgrade from B3 to B2 and to a negative outlook in November 2019.The business confidence has been persistently lower as the country was confronted with the power cuts in fact gravitating to its lowest in 34 years in 2019. "Unreliable electricity supply, persistent weak business confidence and investment as well as long-standing structural labour market rigidities continue to constrain South Africa's economic growth” The Rating Agency said.
The truth is the government has made some efforts to perk up job creation and economic growth but if not at all, just almost never felt within issues addressed. The economy fell by 1.4% in the fourth quarter of 2019 slipping recession after contracting by 0.6% a quarter earlier. The country is still plagued by youth joblessness albeit extensive efforts to poineer initiatives for youth employment creation. The overall unemployment remained unchanged in the fourth quarter of 2019 from Q3 figures of 29.1%.
"As a result, South Africa is entering a period of much lower global growth in an economically vulnerable position. The government's own capacity to limit the economic deterioration, in the current shock and more durably is constrained," it said.
The rating agency added that progress on structural economic reforms had been "very limited".
"Some initiatives to improve competition and encourage job creation have progressed, but none that constitute a step-change for the economy."
"Structural issues such as labour market rigidities and uncertainty over property rights generated by the planned land reform remain unaddressed. Moreover, a strategy to stabilize electricity production has been slow to emerge and has yet to prove its effectiveness."
As already highlighted, the country has been delaying on land reform issues upon which nobody knows the government stance although there have been some signs of considering a constitutional change to pave a way for expropriation without compensation. The downgrade didn’t come as a result of CoronaVirus, rather the government’s inabilities to address issues given birth to during the last parliament led by President Jacob Zuma. The government has been hobbling to deal with issues such joblessness, mounting debt to GDP ratio, deteriorating fiscal stance, land reform, the ailing parastatals etc. at times leaving them with limited room to raise tax rates and implementations of measures and structural reforms to perk up investors confidence, inclusive growth and macroeconomic stability. Strengthening access to fair labour market and participation in regional market to create a providential space for small business to thrive, was supposed serve as apparatus for poverty and inequality.
By: Mmamoloko Erasmus Boshomane
Email: eboshomane7@gmail.com
+27 84 847 6895 & +27 79 457 3199
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