Rand crashes through R19/$ and is down more than 18% in the past month.
SA was dealt another blow late on Friday when Fitch Ratings downgraded the country further into junk, just a week after Moody’s Investors Service stripped it of its last remaining investment grade. The rand extended its losses, crashing through R19/$.
Fitch said it had cut SA one notch to BB from BB+ because the country lacked a “clear path towards” stabilising its debt position, a situation that would be worsened by the effect of the Covid-19 shock on economic growth and public finances.
It maintained a negative outlook, meaning the next move is more likely to be further down the junk scale, because it saw “the prospect of further significant upside pressure on government debt and additional downside risks associated with the global shock”.
The Fitch move came at the end of a difficult week for markets, with general volatility worsened by concern that SA’s credit-rating downgrade by Moody’s would lead to an exodus of funds, increasing government’s borrowing costs at a time when a shrinking economy will decimate its tax collection.
While the Fitch move may be seen as less important than that of Moody’s, which put SA into junk with all three major companies and on course to fall out of key indices such as the FTSE World Government Bond Index, it reinforces negative sentiment towards an economy that slipped into recession even before the coronavirus outbreak.
Like Moody’s, Fitch was pessimistic that the government would be able to renegotiate its three-year wage deal with public-sector unions, on which the numbers in the February budget were premised. The company also said that a new wage deal in 2021 was also “unlikely to result in the projected savings”.
The rand weakened 2.84% to R19/$ at 6.27pm, down 7.28% for the week and 18.58% over the past month.
Fitch said it expected the consolidated fiscal deficit to surge to 11.5% of GDP in 2020/21, which is more than the 8.5% predicted by Moody’s last week. Government debt, including that owed by municipalities, as proportion of GDP will jump to 80.2% in 2021/22, “well above the 2019 BB category median of 46.5%”.
In his reaction, finance minister Tito Mboweni acknowledged that noninvestment grade ratings have undesirable implications for the whole economy.
“To assure all South Africans, government is seized with addressing and minimising the impact of Covid-19, implementing measures to improve economic growth and setting government finances on a sustainable trajectory,” he said.