By Kerstin Engler, Senior Wealth Manager, Geneva Management Group
While South Africans were busy preparing for a 21-day shutdown, the ratings downgrade which hung like the sword of Damocles over the country would’ve been pushed to the back of its collective conscience. On Friday, the sword fell, pushing the country into junk status.
It could not have come at a worse time and begs the question of whether credit rating reviews make sense in a time of crisis.
With Moody‘s following its peer agencies and rating the country below investment grade, South Africa has fallen out from important bond indices, making it much more expensive for the country to borrow money.
The downgrade has already had consequences. Following the announcement, the ZAR lost nearly two percent versus the USD which leads to a loss of more than six percent since the beginning of March.
Over the next week, we will see whether the markets have already priced the downgrade in as some analysts have suggested.
Even if the downgrade is already priced in, it will result in further pain for an economy that was already shrinking prior to the shutdown and will undoubtedly have a negative impact on the national budget.
The irony is that Covid-19 has forced South Africa to implement many of the structural reforms that might’ve saved it from a downgrade. On Wednesday, the South African Reserve Bank stepped into the secondary bond market to purchase government bonds with newly created money.
In an interview, Deputy Governor Fundi Tshazibana said, “In normal circumstances, printing money to fund spending leads to inflation. But in these circumstances, there is no demand — demand is collapsing as people lose their incomes. It’s about trying to get income into people’s hands so that they can buy food and essential items, otherwise they will starve to death.”
With this move, the cost of borrowing will be lowered and increase the government’s ability to issue debt to counter the effects of the coronavirus pandemic.
The question now is how the government and the Reserve Bank will address the aggravated situation. What measures can it take to stabilise the country’s economy? Can a sell-off in local assets be prevented?
One minor consolation is that South Africa is not alone in the economic challenges it faces. Most economies around the world are under pressure, facing something that’s completely unprecedented.
Knowing this, shouldn’t rating agencies put their decisions on hold when extraordinary circumstances occur?.
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