The decision by Moody’s could not have come at a worse time, says Treasury, after S&P and Fitch downgraded SA to junk in 2017 already.
After South Africa’s sovereign credit rating was downgraded to subinvestment grade, or “junk status”, by Moody’s – the last ratings agency to do so – on Friday, government reacted with dismay.Moody’s cited in a statement the deterioration in SA’s fiscal strength and “structurally very weak growth” as reasons for lowering the rating to Ba1 from Baa3. The outlook remained negative.
According to Moody’s, the key drivers were structurally very weak growth and constrained capacity to stimulate the economy, and an inexorable rise in government debt over the medium term. “The decision by Moody’s could not have come at a worse time,” said Treasury. “South Africa, like many other countries, is seized with containing the outbreak of the coronavirus. The impact of Covid-19 is felt across various sectors of the economy including the financial markets which experienced a significant sell-off in equities, bonds and exchange rates as investors retreated to safe haven securities amid the uncertainty.
“The sovereign downgrade will further see South Africa being excluded from the FTSE World Government Bond Index and the government bond market will experience further capital outflows as fund managers with investment grade mandates will be forced to sell South African government bonds. Non-residents currently hold approximately 37% of the total domestic government bonds and the number is expected to substantially decline with the combined impact of Covid-19 and the downgrade.
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