23 NOVEMBER 2020 The African Peer Review Mechanism (APRM), a specialized entity of the African Union (AU), supports African countries in the area of credit rating agencies. As part of this mandate, the APRM undertakes routine reviews of rating opinions of African countries issued by international credit ratings agencies. Accordingly, the APRM has noted the downgraded by the two dominant international credit rating agencies – Fitch and Moody’ – on the 20th of November 2020 on the Government of South Africa’s long-term foreign currency credit rating. Whilst the rating actions have been justified by the two agencies, the APRM raises the following observations.
- The double rating downgrades is immediately translating to high debt costs making government debt unsustainable, deteriorating asset values and reduction in disposable income for many. This is exacerbating the deterioration of South Africa’s fiscal position, undermining the government’s fiscal consolidation efforts.
- This is the second time such ratings downgrade are happening since the beginning of the COVID-19 pandemic on the basis of largely the same rating drivers of economic contraction, expectation that fiscal deficit will widen and government debt will rise. These risk factors have not significantly changed since the rating agencies had already acted on them with previous rating actions during the COVID-19 peak period. It would therefore have been prudent for the two rating agencies to grant the South African government reprieve to implement its recently delivered Medium-Term Budget Policy, which seeks to pursue fundamental reforms to stimulate economic growth, reduce spending, narrow the deficit and bring down the debt-growth trajectory.
- It was premature to assess the outcomes of the proposed fiscal consolidation plans. The downgrades could have waited to see whether the government is committed to fiscal consolidation through, for instance, assessment of the outcomes of the ongoing public sector wage negotiations inline with 2020 Medium-Term budget assumptions which has plans to pare the government’s salary bill.
- The timing of the rating downgrades during the pandemic crisis continue to raise question on the procyclical approach of rating agencies – when bad news is piled on bad news – putting a further strain on an economy that are already strained by the impact of COVID-19.
- The South African Reserve Bank (SARB) forecasted the economy could expand by an annualized 45.2% in the third quarter, the biggest quarterly increase in at least 30 years. The rating agencies also acknowledge that the country’s economy is beginning to rebound in the third quarter and that the South Africa’s rating strengths remains in its 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. These factors should have been sufficient for the rating agencies to leave South Africa’s rating unchanged at one level below investment grade.
Based on these factors, the APRM will provide technical and operational support to; the South Africa credit rating liaison team in preparing for upcoming credit rating review, the National Treasury for implementation of admissible rating recommendations, and engage rating agencies on information exchange with aim of avoiding further downgrades.