It looks as if the next five months could be a white-knuckle ride for the South African economy. Following last week’s devastating GDP figures, credit ratings agency Moody’s have weighed in with their opinions. Although they haven’t yet signed Mzansi’s death warrant, they’re certainly dipping their quill in the “junk status” ink.
When South Africa will get another credit rating
Moody’s were initially meant to deliver South Africa’s credit rating in March, but passed over the opportunity. No decision will be made until November, by which time South Africa could be in a technical recession.
It would mark the second such economic downturn in 18 months of Cyril Ramaphosa’s presidency. GDP shrank by 3.2% in the first quarter of the year, and there is a real chance another quarter of negative growth will plunge South Africa into the doldrums once more.
How do credit ratings work?
Moody’s has South Africa’s rating at Baa3, one notch above sub-investment grade. Anything underneath this – figures such as Ba1, Ba2 and Ba3 – will drag South Africa into the pit of “junk status”. When slipping below the investment grade, it acts as a severe warning to foreign powers that they must not put their money into South Africa.
Such a move would see “hundreds of billions of Rand” exit South African. Any sort of downgrade from the group would push Mzansi into sub-investment status for the third time in two years. Agencies S&P and Fitch downgraded SA to junk in 2017, following a poor market slump under the stewardship of Jacob Zuma.
Factors steering South Africa towards junk status
In their frank assessment – released on Monday morning – Moody’s took shots at the “low growth environment” Mzansi is currently harbouring. They revised South Africa’s growth forecast for 2019 from 1.3% to 1.0%, highlighting that a weak economy will “hamper” the performance of bank loans:
“The low growth environment will suppress business opportunities and loan demand. Banks are already competing for better quality borrowers, and revenue is under pressure amid competition from new entrants and widespread migration to mobile and digital platforms.”
“We expect that the performance of bank loans will remain hampered by South Africa’s weak economy, which will strain borrower cash flows and make it more difficult for them to manage loan.”
Can we avoid junk status?
There may be a silver lining to this extremely threatening storm cloud, though: They said that there would be mitigating circumstances with any credit ratings decision. Moody’s say they have faith in SA’s big five banks ability to handle deteriorating asset quality, and the country has a relatively low debt-to-GDP ratio.