SA's credit rating has dipped deeper into junk territory after a surprise downgrade by two of the big three international rating agencies late on Friday night.
The downgrades could make it even more expensive for the government to borrow on the market.
They will also make it less likely for SA to regain the coveted investment grade status soon.
Moody's and Fitch cited SA's rapidly rising government debt burden and weak economic growth prospects as reasons for their decision.
They said the Covid pandemic had intensified SA's economic challenges and widened inequality, making necessary economic reforms more difficult.
The latest downgrade decisions by the two agencies come after SA lost its last investment-grade rating with a shock Moody's downgrade just a day after it went into lockdown in March.
This triggered capital outflows as foreign funds that could invest only in investment-grade bonds sold out. It added to the bond market's Covid crisis woes and forced the Reserve Bank to step in to keep the market functioning.
Friday night's moves put SA two notches below investment grade on the Moody's and Fitch scales.
SA is rated three notches down by S&P Global Ratings, which left its rating unchanged on Friday night, along with its stable outlook on the rating.
By contrast, Moody's and Fitch still have a negative outlook on their ratings, suggesting they could look to further downgrades in months to come.
Friday was the scheduled date for updates from the agencies, which generally review their ratings twice a year. But the downgrades came as a surprise to most analysts and market players, who had expected they might make changes only after the main budget in February.
KEEP THE FISCAL SANCTITY
Finance minister Tito Mboweni said the decision by Fitch and Moody's to downgrade SA further was a painful one, which would have immediate implications for SA's borrowing costs and further constrain its budget.
"There is, therefore, an urgent need for government and its social partners to work together to ensure that we keep the sanctity of the fiscal framework and implement much-needed structural economic reforms to avoid further harm to our sovereign rating," Mboweni said in a statement yesterday.
The finance minister also implored South Africans to adhere to health and safety protocols to avoid a second wave of Covid-19 infections that would hit the economy and jobs.
Business Unity SA said it hoped the ratings decisions would galvanise SA to take action to address the concerns raised by rating agencies. It was ready to work with the government and other social partners to address the issues, which "include the weakening of our fiscal strength over the medium term, implementation risk related to structural reform, rising government debt, low growth trend and our track record on implementation".
Moody's analysts Lucie Villa and Marie Diron said the key driver for the downgrade was the expected further weakening of SA's fiscal strength over the medium term. Whereas the March downgrade had reflected a pre-Covid crisis deterioration, "today's action reflects Moody's assessment of the pandemic shock, both directly on the debt burden and indirectly by intensifying the country's economic challenges and the social obstacles to reforms".
They also questioned the government's ability to adhere to the spending cuts that Mboweni budgeted for in his medium-term budget last month, especially the cuts to the public sector wage bill.
Fitch said SA's low trend growth and high inequality would continue to complicate fiscal consolidation efforts. Its downgrade and negative outlook reflected "high and rising government debt exacerbated".
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