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Moody's downgrade a death blow amid coronavirus pandemic

Source:  (ZAR/USD Currency Pair)
Source: (ZAR/USD Currency Pair)

The South African economy is currently laboring through one of its worst periods in history, what with the double impact of the Moody's downgrade and the coronavirus. The South African rand nosedived in recent weeks, from a value of $0.0667 (200-day moving average) to its current rate of $0.0520, and falling fast. The rand, like other emerging market currencies is under heavy selling pressure as investors scramble to buy up precious USD which is the world's premier reserve currency.

Judging by economic data, the US dollar index reflects an insatiable appetite for greenbacks as the coronavirus rips through the global economy. The three-month performance of the US dollar index (DXY) is 4.24%, and the one-month performance is +6.19%. As traders and investors scramble to dump currencies like the Brazilian real, the South African rand, the Indian rupee, the Russian ruble, the Chinese yuan, and others, the focus has shifted towards the USD, GBP, EUR, and CHF.

Source:  US Dollar Index (April 6, 2020)
Source: MarketWatch US Dollar Index (April 6, 2020)

Ratings agencies like Moody's are especially important for emerging market countries like South Africa. If these external bodies drop the country’s rating status to junk status, it sends an unequivocal symbol to international investors – the country is not a safe investment. Now that Moody's has downgraded South Africa to sub-investment grade (Ba1), with a negative prognosis moving forward, South Africa's economy is staring down the barrel with its finger on the trigger. S&P has South Africa on a BB rating, with other ratings agencies like Fitch intent on dropping the country's credit rating further. That this news was released in tandem with the coronavirus pandemic is particularly devastating to the economy.

World economists and investment experts at companies like Investec anticipate that the global economy will fully recover by 2021, beginning late in 2020. The South African economy is expected to grow at a negative rate of 2.7% year-on-year, this year. The sharpest declines are anticipated in April, May, and June 2020. However, consensus forecasts have not factored in the full impact of the coronavirus and the financial, medical, economic, and unemployment pressures it will bring to bear on the South African government. According to Trading Economics, the South African economy has a government debt to GDP ratio of 62.20%, with a current account to GDP ratio of -3.

Despite protestations to the contrary, the economic calendar for South Africa is none too rosy. On Tuesday, 21 April 2020, the leading business cycle indicator (month on month) will be announced. This will be followed by the inflation rate (year-on-year) on Wednesday, 29 April 2020, and the M3 money supply (year-on-year) for South Africa on Thursday, 30 April 2020. Another important metric will also be released at the end of the month – the Balance of Trade from March. Heading into May, the ABSA Manufacturing PMI data will be announced, followed by Total New Vehicle Sales. These announcements give valuable insights to traders and investors intent on gauging market sentiment for hedging, investment, and speculative purposes.

Global pandemic has SA in its crosshairs

Source: Trading Economics
Source: Trading Economics

Consumer confidence in South Africa is negative; retail sales month on month are anemic, and the government budget is -6.30% of the GDP.Trading Economics estimates that the South African rand will devalue further towards 20.38 in 2021, marking a dramatic year of declines for the beleaguered emerging market currency. If these forecasts hold true, it will ramp up the export potential of South Africa's products and services, but severely curtail imports and drive up inflationary pressures in the country.

Covid-19 has brought tremendous pain and suffering to the South African economy too, as the three-week lockdown keeps people at home, and the economy shuttered. Knowing this, Moody's still decided to go ahead and issue a junk rating status for South Africa's economy. The move from BB + to BB accelerates declines for the ZAR, in the face of overwhelming global uncertainty. The move by Moody's is echoed by Fitch which is eager to downgrade South Africa's economy even further.

What this means in practical terms is that South Africa's bonds will not be desirable on international markets. Valuable foreign currency will be severely lacking, making it difficult for the country to remain economically viable. The dual impact of the coronavirus pandemic on worldwide economic activity will naturally serve as a disincentive to foreign investors for FDI into emerging markets.

South Africa is already struggling with a recession (2019), and now the ill-effects of the pandemic are making it impossible to stage a recovery. Fitch anticipates a fiscal deficit of 11.5% of gross domestic product for the full year of 2020 and 2021, up from just 6.6% for the full year of 2019 and 2020. While this forecasting is not set in stone, it is a harbinger of negative sentiment.

Structural reforms needed for economic growth

From a South African perspective, there is cold comfort in the knowledge that the global economy is suffering through an epic crisis. Many believe that South Africa requires structural reforms for any meaningful economic growth to take place. While tremendous weight is placed on the opinions of these credit ratings agencies, there are those who believe these agencies may be responsible for the preponderance of financial crises at key intervals throughout history. Nonetheless, the 21-day nationwide lockdown is expected to affect every sector in the country, causing damage and suffering across the board. This will impact medical support providers, medical supply chains, food supply, and a multitude of service providers too.

The prognosis for growth and development is hamstrung by the fact that liquidity has all but dried up. Supply and demand remain dangerously low, driven by low levels of economic activity, fear, and negative speculative sentiment. That being said, there is hope that the curve of the coronaviruses flattening out in countries like Spain and Italy, and states like New York which has endured tremendous strain in recent weeks. Nonetheless, the death toll is surging globally and the pandemic is likely to exact tremendous economic pain and suffering across the board. It may well be that this is the ‘lost year’ that many economists allude to.

9 Apr 2020 11:49


About Boris Dzhingarov

Boris Dzhingarov graduated UNWE with a major in marketing. He is the CEO of ESBO ltd brand mentioning agency. He writes for several online sites such as,,, Boris is the founder of and