Is South Africa still in junk status? For development purposes, South Africa makes substantial investments so that its economy and the lives of its citizens are at or above acceptable levels. The investment levels are analyzed by three international agencies, which then evaluate the South Africa junk status. Keep reading to find out more.
What is junk status? What does junk status mean for a country? Junk status meaning Wikipedia refers to high-yield debt, which is a term that is used to describe a nation whose levels of investment are below the acceptable investment grade. The three firms involved in determining the junk status South Africa are Fitch, S&P, and Moody’s. It is in the best interest of a country to stay out of the junk status zone, therefore, it is important for us to examine South Africa junk status 2019 to know if we are doing well as a country or not.
READ ALSO: SA heading for junk status
As of February 2019, the South Africa junk status was in a precarious position since two of the three firms (except Moody’s) had already junked the nation in 2018. The reason why the two firms decided to junk South Africa was that there was an unfavourable budget in 2017 as well as a cabinet reshuffle. As it stands, South Africa still has an investment-grade rating from Moody’s. If Moody’s saw it fit to downgrade South Africa, then the investment-grade would be lost and it would have a junk status. What could be the reason for South Africa to be downgraded to junk status? As things stand, the grading hangs on the shoulders of the South African state-owned power utility company, Eskom, and here is why.
Presently, Eskom is in a financial crisis that needs to be dealt with by the government fast. The company has been promised a bailout, although nothing significant has been done. At the very least, the Eskom group expects a bailout of around R100 billion to handle debt. One of the plans of saving Eskom is dividing the company into three parts, which is not a plan that is viewed by many as being the way out. Matters are complicated even more when one considers that the credit rating of South Africa is weak after the mid-term budget policy statement of 2018. The statement brought to light that there is a high level of foreign ownership, which leaves South Africa vulnerable to investor whims.
Prior to the budget speech in February 2019, PwC stated three key factors to South Africa avoiding a downgrade. PwC suggested that the address by Tito Mboweni should have touched on the rate of fiscal consolidation, the measures taken for economic improvement, and reformation of state-owned enterprises (like Eskom). Essentially, the minister needed to assure credit rating agencies that South Africa was heading in the right direction economically.
What is South Africa junk status history? Simply put, amidst all this turmoil, it is important to remember that the economic issues started way back during Jacob Zuma’s time. During his time, the country was lowered to junk status more than once. The economic improvements promised by Cyril Ramaphosa failed to materialize after the country entered a technical recession in September 2018. Consequently, the rand spiraled until the end of the recession in December 2018.
Budget speech reaction
Unfortunately, SA junk status may have been adversely affected after the speech as Moody’s came out and stated that it was not convinced. Instead, the firm stated that the minister only highlighted the limited fiscal flexibility of South Africa. This has sparked fears that the firm will downgrade the country and plunge it in the realm of junk status again. Check the tweet below.
Moody’s rating of the South Africa junk status is just above the junk region. The exact rating of Moody’s is Baa3, which is exactly one step above the sub-investment level. Sub-investment levels include Ba1, Ba2, and Ba3. A poor level of investment increases the price of borrowing and drives away possible investors, which further plunges South Africa into crisis. With all these details, you now have a clear picture of this worrying South Africa's junk status 2019.