Business organisation Business Leadership South Africa (BLSA) says Moody’s downgrade of South Africa’s debt rating to junk status will significantly impact on the way the economy is defended through the Covid-19 crisis.

On March 27, the ratings agency downgraded South Africa’s sovereign credit rating to junk status, despite industry calls for the decision to be postponed until after the Covid-19 pandemic passes in South Africa, as it has frustrated economic reform efforts.

Moody’s downgraded the country’s long-term foreign currency and local currency issuer ratings to Ba1 from Baa3, with a negative outlook. The Ba1 rating has a significant credit risk implication.

Financial institution Citadel chief economist Maarten Ackerman says the rating downgrade came as no surprise, since South Africa’s fiscal metrics had been unsustainable for some time.

“If the global outlook had not deteriorated so significantly, there might have been a chance that Moody’s would still have acknowledged the reform-minded government’s potential to set the economy right. However, this was not to be and Moody’s hands were effectively tied,” he highlights.

The National Treasury points out that the sovereign downgrade will further add to the prevailing financial market stress. These two events will truly test South African financial markets.

“South Africa’s deep, stable financial sector and robust macroeconomic policy framework had always been flagged as a credit strength, including the South African Reserve Bank’s demonstration of a good track record in implementing credible and effective monetary policy and preserving financial stability.

“However, the sovereign downgrade will see South Africa being excluded from the 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,” the Treasury says.

Nonresidents hold about 37%, or R800-billion, of total domestic government bonds and the number is expected to substantially decline with the combined impact of Covid-19 and the downgrade.

The interest rate for government, households and the broader economy is also expected to increase as a result. While some market participants argue that the impact of a sovereign downgrade has already been priced in, it is difficult to stipulate the extent with certainty.

“Therefore, to say we are not concerned and trembling in our boots about what might be in the coming weeks and months is an understatement,” Finance Minister Tito Mboweni said.

BLSA explains that the Covid-19 crisis was not directly relevant to Moody’s decision, though it complicated the situation, exacerbating the challenge of rebuilding an economy capable of regaining investment-grade status in the future.

“South Africa gained investment-grade [status] 21 years ago, after hard work by government to put the country’s finances on a sound footing. We had lost it, owing to mismanagement and corruption through the years of Jacob Zuma’s Presidency, which allowed debt levels to balloon massively, making ratings agencies doubt the country’s creditworthiness, while undermining key oversight institutions,” BLSA notes.

The organisation adds that South Africa’s creditworthiness was further negatively impacted on because of negative per capita economic growth for the past five years, which has constrained tax collection and employment.

BLSA believes the most prominent issue that has endured from the prior Presidency period was capable leadership at Eskom, as well as allowing a further round of independent power producer procurement and allowing self-generation by companies.

Moody’s cited labour market reform that had not been delivered as a reason for its decision, as well as easier obtaining of visas for foreigners, outstanding mining regulations and an outstanding regulatory environment that was conducive for oil and gas development.

Financial consultancy Intellidex says Moody’s is likely to cut South Africa’s ratings again next year, while ratings agencies Standard & Poor’s and Fitch are both also likely to downgrade South Africa further in the coming months.

In light of Covid-19, the Moody’s downgrade and the state of the economy prior to these events, Investec says South Africa’s gross domestic product is likely to contract by 2.7% this year, especially owing to worsening government finances, as resources are being directed to mitigate the impacts of Covid-19.

The asset management company says South Africa is at risk of another credit rating downgrade, potentially before the end of the year. Further credit rating downgrades to South Africa’s sovereign debt will further weaken financial market indicators, negatively impacting on the growth and socioeconomic outlook.

Standard Bank South Africa CE Lungisa Fuzile says South Africa’s economic and fiscal challenges will be exacerbated by the deteriorating global economic outlook and the next few months will indeed be a very challenging time for every South African.

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BLSA acknowledges that it was necessary for President Cyril Ramaphosa to declare a state of emergency, since it enabled him to access more resources and implement regulations more rapidly.

At the same time, employers needed access to payroll support to avoid having to lay off idle workers as a result of the subsequently declared lockdown.

The organisation adds that companies need access to bridging finance through either the banking system or some other mechanism to avert business rescue proceedings.

Intellidex says the National Treasury must move with speed to re-establish credibility.

“An emergency Budget at the end of April, after the lockdown, is crucial. The Budget should lay out, transparently, what is going on with growth, the revenue impact of Covid-19 and the implications for the fiscal framework and issuance. This would ensure the Treasury [retained] decent access to market for issuance into a hugely challenging second quarter,” the consultancy states.

Business organisation Business Unity South Africa (Busa) says now is not the time for pointing fingers or starting blame games.

Instead, the country needs to concentrate all its resources and capacity on beating the virus before the country ends up in a worse position economically.

Busa stresses the need for structural changes in the economy, less public-sector expenditure, less wastage of resources on insolvent State-owned enterprises, doing away with legislation that erodes investor confidence and government provision of cohesive messages.

The National Treasury, meanwhile, assures that the South African Reserve Bank is already working on measures to stabilise financial markets, while government is working on structural economic reforms.