Government’s policy priorities remain on economic recovery and fiscal consolidation, as outlined in President Cyril Ramaphosa’s Economic Reconstruction and Recovery plan and the Medium-Term Budget Policy Statement released in October. The social compact agreed to between government, business, labour and civil society prioritises short-term measures to support the economy, alongside crucial structural economic reforms.
“The decision by Fitch and Moody’s to downgrade the country further is a painful one. The downgrade will not only have immediate implications for our borrowing costs, it will also constrain our fiscal framework. There is, therefore, an urgent need for government and its social partners to work together to ensure that we keep the sanctity of the fiscal framework and implement much-needed structural economic reforms to avoid further harm to our sovereign rating.” Minister of Finance, Mr Tito Mboweni, said.
Rating agencies have indicated that South Africa’s rating strengths include a credible central bank, a flexible exchange rate, an actively traded currency, and deep capital markets, which should help counterbalance low economic growth and fiscal pressures.
Sub-investment grade implications – what does it mean for the average South African
The Covid-19 pandemic shock hit South Africa at a difficult time. Recent downgrades saw South Africa reaching its lowest credit rating levels from the ‘big three’ rating agencies since 1994. Economic growth has continued to decline irrespective of the attempts to reduce structural constraints.
Financial strain to the government caused by the pandemic, weak economic growth, high wage bill as well as continuous support to the financially weak State-owned Companies have weakened public finances and led to government accumulating debt. Currently, government has accumulated debt stock of nearly R4 trillion and spends approximately R226 billion on interest costs.
If the cost of borrowing money for government increases, it means that government will have to either cut back on social spending or increase taxes. Further downgrades will extend the impact of lockdown restrictions. These restrictions led to many workers being laid off from work since companies were temporarily closing doors and cutting back on operational costs. Continuous rating downgrades will translate to unaffordable debt costs, deteriorating asset values (such as retirement, other savings and property) and reduction in disposable income for many.
Rating downgrades associated with Covid-19 have also resulted in many small businesses closing down and laying off a number of workers. Operational costs together with borrowing costs are expected to increase, supporting the motive to pass through the costs to consumers or further laying off workers.
The recent rating outcomes means that South Africa needs to fast track growth-enhancing strategies in order to rectify the accumulation of debt and minimize the costs associated with negative sentiments.