Moody’s has finally dropped the sword on South Africa, following in the steps of fellow ratings agencies S&P and Fitch in downgrading the country’s sovereign credit rating to sub-investment grade or “junk status”. And the COVID-19 crisis and current lockdown mean that even before factoring in the impact of Moody’s decision, the economic outlook for SA in 2020 continues to be harrowing.
"Additionally, while revenue from personal income tax (PIT) may remain relatively resilient in the near term, it is likely to fall throughout the rest of the fiscal year. VAT intakes will likewise dive off a cliff in March and April, with the possibility of a reasonable recovery thereafter, while corporate income tax (CIT) levels will step down dramatically in line with economic growth.
"This COVID-19 fiscal gap means that the budget deficit will come under severe pressure this year. We had already penned in a deficit of 6.8% of gross domestic product (GDP) at the reading of the National Budget in February. Just four weeks later, it looks like that figure could blow out into double digits.
All in all, government, businesses and households can expect the lower credit rating to translate into a higher cost of borrowing and higher interest charges.
'Impact on credit extension rates'
While private sector credit extensions have lifted slightly in February on higher rate of corporate credit, household credit has slowed, according to Investec industry analysis.
"The expected economic slowdown, in the aftermath of the coronavirus linked disruptions, the Moody’s downgrade to non-investment grade and persistent infrastructure constraints, is likely to impact credit extension rates. The negative effects on employment and small businesses especially, could translate to a rise in delinquencies and consequent increased risk aversion amongst lenders."
"With the ratio of household debt to disposable income elevated at 72.8% in 2019, the household financial position is particularly vulnerable to a further squeeze on incomes."
'Downgrade already priced in'
Many analysts and commentators have suggested that the downgrade is already reflected in market prices.
Commenting on the downgrade Dr Andrew Golding, chief executive of the Pam Golding Property group says, “While a negative development amid an already bleak situation, in a curious twist of fate it probably matters less now than it might have done, if it had occurred pre-Covid-19, as the entire globe is currently in entirely unchartered territory, with all economies taking significant strain."
"The market has already largely priced in the downgrade, including a call for a dramatic, further reduction in the interest rate in order to bolster the economy, particularly in the wake of the pandemic. Since the local property market is driven by sentiment, there are bound to be negative effects from the global pandemic, which are likely to remain over the medium to longer term unless whatever stimulus there is available to the economy is provided as a matter of urgency," says Golding.
The Reserve Bank’s Monetary Policy Committee cut the repo rate by 1 percent to 5.25% (from 6.25%) reducing the mortgage rate to 8.75% (from 9.75%) earlier in March and Government has put a number of economic interventions in place including The Covid-19 Temporary Relief Benefit. Businesses can apply for assistance for up to three months including having a portion of salaries paid to workers, if they can prove the impact due to the enforced lockdown to break the spread of the virus.
SEE: SA lockdown | Covid-19 funding measures put in place to buffer battered economy
In good economics there is always a 'however', suggests Saville in reference to the priced-in downgrade.
"In this case, the 'however', is that we will only know when capital market participants begin responding to the rating assessment. For investors whose mandates prevent them from investing in sub-investment grade bonds (such as foreign pension funds), the downgrade will only oblige them to sell out of SA government bonds when the decision takes effect at the end of April. This means that we may not see the full impact of the downgrade until May," he says.
"If that is the case, and if the downgrade isn’t already in priced in, then the sell-off in government bonds and subsequent conversion of rand sales into dollars, will translate into weaker government bond prices and a weaker rand. In turn, weaker government bonds will lead to higher interest rates and higher borrowing costs for government, as well as for businesses and households with company debt, mortgages and vehicle loans.
"Meanwhile, a weaker rand will have an inflationary effect, because as much as one-third of the South African economy is made up of imported inputs or imported final goods. It could take as long as nine months for this imported inflation to pass through into the economy, but its effects will be damaging," says Saville.
Property investment in the time of Covid-19
Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett, advises South Africans to remain calm and to consider a few realities.
“It will be helpful to put a different spin on it by considering a few realities. The first being that right now, there are bigger issues to focus on, like keeping your family safe and not getting sick yourself.”
Goslett sees a positive aspect to the downgrade in that "if we borrow from the IMF, they will force policy change. And this could be a good thing for our country."
His advice is to start lowering debt immediately, “do whatever it takes now because access to finance will become more expensive in the future."
SEE: Property24 waivers fees for agents as SA braces for impact of Covid-19 lockdown
The road back for SA?
“There are still sellers and buyers in the market who are able and willing to transact and technology means that buyers - many of whom now have more available time than before - are able to browse neighbourhoods and properties, in many instances viewing virtual tours of homes while they weigh up all the options, taking into account information and advice on offer via reputable, experienced real estate agents," says Golding
“We believe that the high demand for accommodation experienced in the sub-R1 million price band, where no transfer duty is payable, will remain a meaningful contributor to activity in the housing market, as first-time and other buyers seek affordably priced homes. As the Deeds Office is currently closed, transactions underway can still be at least partially processed online, ready to be concluded once the lockdown is lifted.”
Saville sees SA's future as either going the way of South Korea or that of Argentina.
While South Korea returned to its investment-grade rating in just on a year, some 20 years later the South American nation of Argentina is still struggling with its credit rating.
"The South Korean government stepped in with swift and bold policy directives that were supported by national cohesion and a call to action. One example of this is South Korea’s 1998 gold-collecting campaign that saw 3.5 million people collect about 227 tons of gold worth some $2.1 billion to help the country repay its debt to the International Monetary Fund.
"Unfortunately, our local government doesn’t hold quite the same record with implementing policy, and our society’s financial means are far more limited," says Saville.
"We reached this point through years of poor spending behaviour and allowing state capture to run rampant while the SOEs fell into alarming states of financial and operational disarray. Without firm and decisive action, the overwhelming likelihood is that South Africa will follow Argentina’s path, which has also been laid with good intentions and a lack of evidence for these intentions since it went through a series of ratings downgrades in the early 2000s.
"As the famous line from the comic strip “Pogo” goes, 'We have met the enemy, and he is us'. We already know what the issues are that we need to address. So, whilst we find ourselves in socially stressful and economically demanding times, government needs to stop talking, and start doing."
For South Africa to regain investment-grade status it must evidence progress on the following:
- Restoration of sustained economic growth levels above population growth
- Fiscal prudence and the realignment of budgetary spending from current to capital expenditure
- Addressing the problem of unemployment, and particularly youth unemployment
- Restoring the balance sheets and operational capabilities of the SOEs
- Provide clarity regarding property rights
- Prosecute corrupt officials
- Redress grossly skewed inequalities.
"Each of these is a serious task that requires commitment and determination. Notably, the policies to achieve this are already in place, meaning that it is merely a question of action and implementation," says Saville.
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