Ratings agency Moody's has set the clock ticking on a downgrade to junk status for SA.
Its decision late on Friday to put SA's rating on "negative outlook" puts pressure on finance minister Tito Mboweni to deliver a more convincing budget in February than the shock deterioration he outlined in this week's medium-term budget.
This will be crucial if SA is to avoid being junked early next year.
Moody's bleak statement indicated the agency is losing faith in the government's ability to implement the reforms it keeps promising, to lift economic growth and stabilise public finances.
"Moody's decision to change the outlook from stable to negative reflects the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures," said Moody's sovereign analyst Lucie Villa.
This followed Wednesday's medium-term budget, which revealed that SA's public debt is expected to rise sharply over the next three years. The agency indicated that without sharp cuts in the bloated public sector wage bill, this will be hard to stop.
Poor economic growth, large shortfalls in tax revenues and added spending to support ailing state-owned entities have resulted in key fiscal metrics deteriorating sharply. The budget deficit is now expected to average 6.2% over the coming three years, and the debt-to-GDP ratio is expected to reach 71.3% by 2022/2023.
Mboweni slashed SA's 2019 growth forecast to just 0.5%.
"The development of a credible fiscal strategy to contain the rise in debt will be crucial to sustain the rating at its current level," said Villa.
She pointed to deep inequalities and resistance to reforms from key stakeholders as limiting the government's room to adopt and implement structural reforms.
Moody's is the last of the big three ratings agencies to still have SA on investment-grade status, after S&P Global and Fitch junked SA in 2017. A downgrade would put pressure on the rand and could raise the cost of borrowing across the economy, weighing further on SA's economic growth prospects.
The negative outlook gives the agency 12-18 months to decide whether to downgrade. This is better than a negative credit watch, which would have forced Moody's to downgrade or affirm the rating within three months. But economists said the tone of the statement suggested a downgrade early in 2020, not later in the year as many had originally thought.
The negative outlook gives the agency 12-18 months to decide whether to downgrade
Citigroup economist Gina Schoeman said what had stopped a worse outcome, such as a 90-day credit watch, was that the medium-term budget had included a fiscal target - to achieve a primary balance over the next three years to stabilise debt.
However, she said, "you have to show a plan to stabilise the debt . trying to work out what [the government] would actually do right now that could be credible and believable by February is very difficult".
Adrian Saville, CEO of Citadel Asset Managers, said: "The only way government wins this is by getting the unions to agree. Labour's stance is entirely unhelpful. We've lost credibility and are on an unsustainable trajectory."
RMB economist Kim Silberman said the rand exchange rate and government bond prices have weakened since the budget and the currency could easily reach R15,50 to the dollar, with bond yields spiking to 9.40%, as a result of the Moody's move.
In a statement from the Treasury after the news, it said the action offered SA a "narrow window" to demonstrate concrete implementation of reforms.
In its reaction, Business Unity SA president Sipho Pityana said he was "alarmed - but not surprised".
"Business has been saying for months that we need drastic and fundamental action on key economic issues - now it has been confirmed that the lack of action is taking us down an increasingly slippery slope.
"Moody's has rightly pointed out that government has to get its house in order, and if it doesn't, our investment rating will be cut to junk," Pityana said.
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