The decision by Moody’s to cut South Africa’s credit rating to junk could “not have come at a worse time” for South Africa, National Treasury has said, as the country enters a 21-day lockdown period in an effort to slow the spread of the coronavirus.
In its rating action on Friday evening Moody’s cited a deterioration in SA’s fiscal strength and “structurally very weak growth” for its decision to lower the country’s rating to Ba1 from Baa3. The outlook remains negative. It now estimates that SA’s debt burden will reach 91% of GDP in the 2023 fiscal year.
Ahead of Friday evening’s decision, Moody’s was the sole major rating agency to not already have cut SA’s credit rating to junk. Fitch and S&P both downgraded SA to sub investment grade already in in 2017.
Treasury, in a statement, said the downgrade would add to the prevailing financial market stress as the country battles to contain the spread of the coronavirus.
Because of the downgrade, South African government bonds will automatically be excluded from the major FTSE World Government Bond Index. Treasury noted that 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.
The effect on interest rates and currency exchange rates will be extremely negative.