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South Africa Moves One Step Closer to Junk Rating as Moody’s Cuts Outlook

Ana Monteiro and Hari Govind

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Moody’s Investors Service cut the outlook on South Africa’s credit rating to negative from stable, taking the country one step closer to losing its final investment-grade assessment.

It held the foreign- and local-currency readings at Baa3, its lowest investment grade.

The change in outlook reflects “the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures,” the company said in a statement Friday.

South Africa averted a full downgrade even after it released forecasts this week that show its financial situation is rapidly deteriorating. Gross government debt is set to surge to 80.9% of gross domestic product by fiscal 2028 unless urgent action is taken, the National Treasury said Wednesday. The trajectory is almost 20 percentage points higher than projected in the February budget and shows no sign of stabilizing. The budget deficit will peak at an 11-year high in 2020-21.

“The challenges the government faces are evident in the continued deterioration in South Africa’s trend in growth and public debt burden, despite ongoing policy responses,“ Moody’s said.

South Africa Eludes Third Junk Rating as Markets Beg to Differ

The country is already spending 138 billion rand ($9.2 billion) to bail out Eskom Holdings SOC Ltd., the cash-strapped power utility that is seen as the biggest risk to the economy and is saddled with 450 billion rand of debt. Rolling blackouts caused economic output to contract the most in a decade in the first quarter and prompted the Treasury to slash its growth forecast for this year to 0.5%.

The rating affirmation affords South Africa a “narrow window to demonstrate faster and concrete implementation of reforms,” South Africa’s National Treasury said in a statement after the announcement from Moody’s. “Economic reforms have to be implemented without delay.”

In the absence of any further policy response, the combination of rising expenditures and underperforming revenues will cause the fiscal deficit to widen to 6% to 6.5% of GDP over 2019-22 from around 4% over 2015-18, Moody’s said. Government debt will continue to rise to about 70% of GDP by the end of fiscal year 2022, from 57% as of the end of fiscal 2018.

“Fellow South Africans, now is the time to roll our sleeves and do what we have to do,” Finance Minister Tito Mboweni said in the statement. “It is now or never. We need all hands on deck. Government, labour, business and civil society, we need each other more than ever before.”

S&P Global Ratings and Fitch Ratings cut South Africa to junk in 2017.

If Moody’s cuts South Africa’s rating, the country would lose its place in the FTSE World Government Bond Index. Exiting it would spark an investor selloff and outflows of as much as $15 billion, according to Bank of New York Mellon Corp., at a time when the nation needs portfolio investment to finance its persistent current-account deficit. A downgrade would also raise borrowing costs, complicating the government’s efforts to balance the budget.

(Adds Treasury comments in seventh paragraph.)

--With assistance from Prinesha Naidoo and Carolina Wilson.

To contact the reporters on this story: Ana Monteiro in Johannesburg at amonteiro4@bloomberg.net;Hari Govind in San Francisco at hgovind@bloomberg.net

To contact the editors responsible for this story: Rene Vollgraaff at rvollgraaff@bloomberg.net, Jim Silver

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