Borrowing costs

‘Painful’ downgrades will increase South Africa’s borrowing costs, minister says

JOHANNESBURG (Reuters) – South Africa’s finance ministry said on Saturday that downgrading credit ratings by Moody’s and Fitch would increase the country’s borrowing costs and limit its budget options.

FILE PHOTO: South African Finance Minister Tito Mboweni gestures as he delivers his budget speech to parliament in Cape Town, South Africa, February 26, 2020. Reuters / Sumaya Hisham / File Photo

“The decision of Fitch and Moody’s (…) is painful,” said Tito Mboweni, Minister of Finance, in a statement.

There is an urgent need for the government to implement structural economic reforms to avoid further damaging the country’s sovereign rating, he said.

On Friday night, rating agencies Fitch and Moody’s downgraded South Africa’s sovereign ratings into junk territory amid rising debt and a likely further weakening of its fiscal stance. S&P Global has confirmed its rating.

As the COVID-19 pandemic worsens, South Africa’s tax revenues decline as the economy contracts, while spending to contain the spread of the virus and cushion its impact on the poor has increased .

In last month’s mid-term budget, the National Treasury forecast South Africa to run a budget deficit of over 15% of GDP in the fiscal year ending March 2021, the highest in the country. post-apartheid history.

The most industrialized country in Africa currently has a debt of almost 4 trillion rand (260 billion dollars), or 63.3% of the GDP. Its debt-to-GDP ratio is expected to swell to over 90% in three years, the worst such increase in the world.

As ratings go down, the cost of borrowing and servicing debt will rise and the government will either have to cut social spending or raise taxes, the National Treasury said, at a time when nearly a third of the population is unemployed.

“Continued downgrades in credit ratings will translate into unaffordable debt costs, deterioration in asset values ​​(such as pensions, other savings and property) and reduced disposable income for many,” he said. he said, referring to the impact on South Africans.

The market reaction to downgrades is expected to be moderate, said Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Bank.

“The reform momentum (of the government) looks more positive in the short term,” she said, but warned it was fraught with pitfalls.

Reporting by Promit Mukherjee; Editing by Andrew Heavens and Mark Potter