Ratings agency Moody’s has been the final holdout when it comes to downgrading South Africa to junk status, but that may be about to change.
Rivals S&P and Fitch cut the country’s rating over two years ago, dropping South Africa to BB and BB+, respectively.
Moody’s currently has the country at a Baa3 rating and has classified it as ‘not on watch’.
But a recent Bloomberg survey of 17 economists revealed that nine have forecast that Moody’s Investors Service will change its outlook on the nation’s credit rating to negative from stable before the end of the year.
A rating cut may take some time to manifest if the outlook does indeed turn sour, but it’s yet another blow to a country grappling to bring itself together.
Déjà vu
Shortly after the S&P cut in April 2017, Old Mutual Finance in South Africa issued an update to investors to explain the implications of the downgrade, which was prompted by the sacking of then-finance minister Pravin Gordhan.
Dropping the country’s sovereign debt from investment grade to junk signalled to potential investors that the risk of South Africa’s debt had increased because the government might not have enough money to pay back what it borrows.
This meant that the government had to pay more in debt servicing costs and had less money to spend elsewhere.
The knock-on effects for the population were rand depreciation and inflation.
Fitch reduced the country to junk just four days after S&P. If Moody’s is to follow suit, it will be the first time in 25 years that South Africa has not had an investment-grade ranking.
Not the news that people in South Africa want to hear. Especially as the country prepares for a budget policy statement on 30 October.
The Moody’s reassessment will take place just two days later, putting a lot of pressure on finance minister Tito Mboweni.
Fallout
Investors have not had the easiest ride over the past few years and the third rating cut may feel to some like the final nail in the coffin.
In the previous South Africa regional round-up, International Adviser reached out to its readers and asked them for some insights into what the situation is like on the ground.
We received one response and it was not exactly positive.
Opting to remain anonymous, he spoke about well-publicised issues such as crime, corruption, lack of education opportunities and the widening income gap.
It was a conversation heavy with weariness and resignation.
He described South Africa as a country unable to move past its own history, which has bogged down efforts to create “a fairer, safer and more just society”.
“Apartheid was, and is, evil,” he told IA. “But if we are to build a nation, we have to own our future by taking responsibility for the present.”
Sparks linger
But in spite of the downbeat assessment, the anonymous source still has a flicker of hope for his homeland.
“It is a big economy, rich in natural assets, and I believe Mr Ramaphosa could well take us through to a better place.”
Citing excellent infrastructure, an innovative and entrepreneurial population, sophisticated financial services industry and a rich and diverse culture, he hopes “we will find our way through”.
Moody’s may opt to cut the country to non-investment grade, which would make a difficult situation even more challenging.
The greatest sense of frustration for South Africans is that the country should be doing better – but it isn’t.
