Ratings agency Moody’s decision to not downgrade South Africa to junk status, yet, affords the country a narrow window to demonstrate concrete implementation of reforms that are already under way, faster, to lift growth and return finances to a more sustainable path, the National Treasury has commented.

The agency on Friday affirmed South Africa’s long-term foreign and local currency debt rating at ‘Baa3’; however, it has also changed the outlook to negative from stable.

The country’s credit ratings by Moody’s remains at investment grade.

The National Treasury said short- and medium-term reforms were urgently needed to improve its economic performance over the next few years.

North West University Business School economist Raymond Parsons, meanwhile, said Moody’s decision meant that the country had to get its economic house in order, to avoid universal junk status later.

He noted that the decision to reduce the credit rating to negative was not unexpected, given the country’s weak economy and deteriorating public finances.

While the National Treasury’s Medium Term Budget Policy Statement (MTBPS), published last week, included measures to manage public finances, but fell short on creating the necessary confidence that key reforms would be urgently implemented, said Parsons. 

He posited that, to remedy the fiscal situation, a strong and sustained improvement in the country’s flagging growth rate was required.

Business Unity South Africa (Busa) president Sipho Pityana commented that he was “alarmed – but not surprised” by the outlook.

He said Moody’s had effectively given the South African government 18 months to get itself in order.

He also indicated that the MTBPS had fallen short of what was required.

He mentioned that tough political decisions and greater fiscal consolidation would need to be undertaken between now and the February 2020 Budget.

He also noted that Moody’s had correctly pointed out the negative consequences of a lack of common purpose among key stakeholders, with this limiting government’s room to adapt and implement structural reforms.

The Minerals Council South Africa also welcomed Moody’s decision but added that the agency had effectively placed the country on notice that, to preserve the investment-grade rating, the government would need to develop and implement a credible plan to stabilise the country’s finances and national debt levels.

The council said that, for the mining industry to contribute towards this country’s sustainability and growth, it needed to be able to attract and keep investment, which, in turn, required a stable, predictable and competitive investment environment.

Meanwhile, law firm Herbert Smith Freehills co-chair and partner Peter Leon said the rapid deterioration of South Africa’s finances, anaemic economic growth, a 6% fiscal deficit and a debt-to-gross domestic product (GDP) ratio heading to an unsustainable 70% meant that the government had little alternative but to embark on meaningful structural economic reform.

He indicated that much of the plans highlighted in the National Treasury’s August economic growth proposals have yet to be implemented by government.

“Government now has no alternative but to cut the ballooning public sector wage bill, dispose of loss-making State-owned enterprises and open up monopoly network service providers such as Eskom and Transnet to private sector competition. If it fails to do so, junk status and [bailouts by] the International Monetary Fund beckon.”

Stanlib Fixed Income head Victor Mphaphuli indicated that after the MTBPS, bond markets and the rand reacted sharply because it was evident that the country had run the risk of a full downgrade from Moody’s.

He expects that over the next few months, unless government either implements growth-oriented policies or takes hard decisions to bring down the debt-to-GDP ratio, it is likely that there will be a full downgrade.

However, the bond and currency markets have largely priced in this risk already. They are trading as if South Africa were a fully downgraded country.

“Unless the Budget statement in February 2020 shows a marked improvement, the market will continue to price in a premium. This calls for caution in managing fixed income portfolios,” Mphaphuli said.

Intellidex anticipated insufficient progress to be made on fiscal consolidation in the coming months and said there was a significant chance of a downgrade by Moody’s in March.