On Friday, March 27, ratings agency Moody’s downgraded South Africa’s sovereign credit rating to sub-investment grade, from Baa3 to Ba1, effectively a “junk” rating. In a statement, it said, “The key driver behind the downgrade to Ba1 is the continuing deterioration in fiscal strength and structurally very weak growth, which Moody’s does not expect current policy settings to address effectively.”
Why It Matters
The economic prospects of a developing country are heavily dependent on maintaining a good credit rating from Moody’s, Standard & Poor’s, and/or Fitch, the three largest credit rating agencies in the world. These ratings inform would-be investors of the potential risks of getting a return on their investment in a foreign country. Despite South Africa’s position as the most industrialized country in sub-Saharan Africa, years of corruption under former president Jacob Zuma and the associated state capture scandal severely tarnished its reputation. President Cyril Ramaphosa has pledged to rehabilitate South Africa’s financial prospects, but confusion surrounding the ruling ANC’s intention to amend the constitution to allow for the expropriation of land without compensation has rattled the market and made investments a riskier venture, along with an unreliable electricity supply and high unemployment figures.
With South Africa having the highest number of confirmed COVID-19 cases in Africa, the country will need an extensive stimulus package to jump-start its economy once the worst of the pandemic has passed. China is South Africa’s largest trading partner, and China’s economic slowdown in the first quarter of 2020 is expected to be significant. This is already having an effect on South Africa’s trade and foreign direct investment. Diversifying the country’s economy away from Chinese dependency will be that much harder with a junk rating.