South African rand hits a record low

The South African Rand hit a record low against the United States dollar after Moody's Investors Service, the bond credit rating business of Moody's Corporation, removed the last investment-grade credit rating for the country.

Moody's cut the country's rating to Ba1 or junk, from Baa3, one level investment grade, and kept the outlook negative. This saw South Africa's Rand fall by 18.05 versus the US dollar.

The company attributed the downgrade to the continuing deterioration in fiscal strength and structurally very weak growth, which could not be addressed effectively by the current policy setting.

Moody's said the negative outlook reflects the risk that economic growth will prove even weaker and the debt burden will rise even faster and further than currently expected, weakening debt affordability and potentially, access to funding.

Unreliable electrical supply, persistent weak business confidence and investment, as well as long-standing structural labor market rigidities, continue to constrain South Africa's economic growth.

As a result, Moody's said the country is entering a period of much lower global growth in an economically vulnerable position.

"The government's own capacity to limit the economic deterioration, in the current shock and more durably is constrained. Fiscal space is very limited and looser monetary policy will not address underlying structural problems," Moody's said in a statement.

The company added that the unprecedented deterioration in the global economic outlook caused by the rapid spread of the coronavirus outbreak will exacerbate the South Africa's economic and fiscal challenges and will complicate the emergence of effective policy responses.

Currently, South Africa is in a 21-day nationwide lockdown, effective last Thursday, in efforts to control the spread of the coronavirus that has so far infected 1,326 people and killed two in the country.

Moody's projects that South Africa's debt burden will rise over the next five years under any plausible economic and fiscal scenario.

Debt-to-gross domestic product increased by 10 percentage points over 2014-18 and will rise by a further 22 points over 2019-23 under Moody's baseline projections.

Over that timeframe, Moody's expects primary deficits to persist. The fiscal deficit will widen in fiscal 2020 to around 8.5 percent of GDP, as revenue declines this year, only narrowing very gradually thereafter.

"Fiscal strains from interest payments and support to state-owned enterprises will continue," the company said.

Moody's said any fiscal consolidation will rest primarily on containing the large and growing public sector wage bill. The government aims to achieve $8.9 billion, translated to 3 percent of the GDP in savings over the next three fiscal years by keeping wage growth below inflation.

That would mark a material departure from current agreements and past outcomes, and as such is likely to prove challenging to implement. Moody's expects expenditures on wages to exceed the budget at least in 2020.

Having a lower credit rating will increase the government's cost of borrowing by raising the premium demanded by the investors to hold its debt.

The downgrade means that South Africa will be removed from the benchmark World Government Bond Index of local currency debt, resulting in outflows that could hit $11 billion.