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Fitch Kicks South Africa Deeper Into Junk a Week After Moody’s

(Bloomberg) --

Fitch Ratings added to South Africa’s misery on Friday, downgrading the country’s debt further into junk territory a week after Moody’s Investors Service removed its investment-grade credit assessment.

Fitch now assesses the nation’s foreign- and local-currency debt at BB, two steps below investment grade. The foreign-currency assessment is now the same level as S&P Global Ratings, which demoted South Africa to sub-investment grade exactly three years ago. The outlook on the Fitch rating remains negative, which means the next move could be a further downgrade.

The rand extended its decline to its weakest level on record. The currency slumped as much as 3.4%, breaching 19 per dollar for the first time, and traded at 19.0410 by 10:59 p.m. on Friday in Johannesburg.

The downgrade is justified because the government hasn’t shown a clear path toward stabilizing its debt, as well as the expected impact of the Covid-19 shock on public finances and economic growth, Fitch said in a statement Friday. Gross domestic product will contract by 3.8% this year, the company said, as a 21-day lockdown that started a week ago shut down large parts of the economy, including most mines and factories.

Downward Cycle

Africa’s most-industrialized economy is stuck in the longest downward cycle since at least 1945, with business confidence at the lowest in more than two decades and almost a third of the labor force unemployed. Output has been weighed down by power-supply constraints. Eskom Holdings SOC Ltd., which generates about 95% of South Africa’s electricity, regularly implements rolling blackouts to prevent a total collapse of the national grid, and survives on government bailouts.

The coronavirus crisis is hitting public finances that are already weak, Fitch said. The company sees the budget deficit widening to 11.5% of gross domestic product in 2020-21, compared with the government’s February projection of 6.8%. That means general government debt will rise to 80.2% of GDP in 2021-22, Fitch said.

The Treasury’s budget estimates relied heavily on planned spending cuts, which included trimming the public-sector wage bill. Labor unions representing government workers have rejected a revised wage offer that sought to increase the salaries of lower-paid workers by 4.4%, which is less than inflation, while not giving a pay rise to the rest of the civil servants.

The saving on public-sector compensation for this fiscal year is now unlikely to materialize and a new wage deal next year is also unlikely to result in the projected cutbacks, Fitch said.

“The government reiterates its commitment to implement structural economic reforms to address the weak economic growth, constrained fiscus and ailing state-owned companies,” the National Treasury said in an emailed statement. “Furthermore, government continues to prioritize and implement measures announced by the president aimed at containing the spread of Covid-19 as well as limiting its impact on the economy.”

Fitch and S&P first cut South Africa to junk in 2017. While S&P, which also has a negative outlook on the country’s ratings, is scheduled to publish an assessment on May 22, ratings companies can take action at any time if circumstances justify it.

(Updates with wage talks in seventh paragraph)

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