How Did South Africa End Up at Junk Status?

South Africa’s journey to “junk status” marks a significant period in its recent economic history, highlighting how various internal pressures can impact a nation’s financial standing. This term, commonly used in financial circles, refers to a sovereign credit rating that falls below investment grade. It signals that a country’s debt is considered speculative, carrying a higher risk of default.

Understanding Sovereign Credit Ratings

Sovereign credit ratings serve as assessments of a country’s creditworthiness and ability to meet financial obligations. These ratings are issued by prominent international agencies, primarily Standard & Poor’s (S&P), Moody’s Investors Service, and Fitch Ratings. They provide investors insight into the risk associated with lending to a government or investing within its jurisdiction.

Ratings typically employ a letter-grade scale, from “AAA” (excellent credit) down to “D” (default). Ratings are broadly categorized into investment grade and speculative (“junk”) grade. An investment-grade rating suggests a lower risk of default, making a country’s debt attractive to a wider range of institutional investors, such as pension funds and mutual funds, which often have mandates limiting them to investment-grade assets.

Conversely, a rating below “BBB-” by S&P or Fitch, or “Baa3” by Moody’s, places a country’s debt in the speculative or “junk” category. When a country’s debt falls to junk status, it often leads to increased borrowing costs, as lenders demand higher interest rates to compensate for the elevated risk.

Furthermore, a junk status rating can trigger forced selling by certain institutional investors who are legally or by policy restricted from holding non-investment grade bonds. This can lead to capital outflows, currency depreciation, and a decline in investor confidence. This can hinder a country’s ability to finance public projects and attract foreign direct investment, affecting its long-term economic prospects.

Economic Pressures and Deterioration

South Africa experienced prolonged slow economic growth, contributing to its credit rating deterioration. Real Gross Domestic Product (GDP) growth rates consistently lagged, often falling below population growth, leading to a decline in GDP per capita. This subdued economic expansion constrained government revenue, making it challenging to fund public services and manage national finances.

Escalating government debt and widening fiscal deficits also plagued the country. Slowed economic growth increased government borrowing to cover expenses, raising national debt as a percentage of GDP. By 2016, the general government financial balance stood at a deficit of 3.7% of GDP, with external debt at 52.3% of GDP, indicating strain on public finances.

High unemployment rates exacerbated economic challenges, especially among the youth. Persistent joblessness undermined consumer spending and tax collection and contributed to social instability. Lack of job creation reflected underlying structural issues, limiting sustainable growth and increasing social expenditure demands.

State-Owned Enterprises (SOEs) burdened the national fiscus. Companies like Eskom (the national electricity provider) and South African Airways (SAA) faced financial distress, inefficiencies, and governance issues. These entities frequently required government bailouts and guarantees to remain solvent, diverting public funds.

Bailout costs were considerable, with taxpayers contributing hundreds of billions of rand to keep SOEs afloat. For instance, Eskom alone was projected to receive nearly R500 billion in bailouts between 2008/09 and 2025/26. This financial drain, coupled with SOEs’ inability to generate profits, weakened the government’s financial position and added to its contingent liabilities.

Governance Challenges and Policy Uncertainty

Political instability and frequent leadership changes created uncertainty for investors. Unexpected cabinet reshuffles, like the March 2017 removal of the finance minister, sent negative signals to financial markets. These actions were perceived as undermining policy continuity and increasing political risk, making the country less attractive for long-term investment.

Widespread corruption, often termed “state capture,” eroded investor confidence. This involved private interests manipulating government decision-making and state institutions for financial gain. The diversion of public resources and undermining of public sector integrity through state capture had an economic cost, estimated in hundreds of billions of rand, and negatively impacted GDP growth.

Policy uncertainty further deterred investment and economic growth. Inconsistent or unclear government policies across sectors, including mining and land reform, created an unpredictable operating environment for businesses. Such ambiguities made it difficult for investors to plan and commit capital, reducing private sector investment.

Rating agencies also raised concerns regarding the weakening of key public institutions and the rule of law. A decline in institutional strength and governance effectiveness was cited as a factor in downgrades. This erosion undermined the predictability and reliability of the policy framework, contributing to a less favorable investment climate.

The Downgrade Events

South Africa reached junk status through a series of actions by major credit rating agencies. Fitch Ratings was the first to downgrade South Africa’s long-term foreign currency debt to speculative grade in April 2017. Standard & Poor’s (S&P) followed on April 3, 2017, cutting South Africa’s credit rating to BB+, one notch below investment grade, with a negative outlook.

These initial downgrades were triggered by an unscheduled cabinet reshuffle on March 31, 2017, including the finance minister’s dismissal. S&P cited “divisions in the ANC-led government” as increasing the likelihood that “economic growth and fiscal outcomes could suffer.” Fitch also noted that political risks to governance standards and policymaking had increased.

Moody’s Investors Service, the third major agency, maintained South Africa’s rating at investment grade temporarily. However, Moody’s placed the country on review for a downgrade in April 2017, citing concerns over institutional strength, reduced growth prospects due to policy uncertainty, and eroding fiscal strength from rising public debt.

Ultimately, Moody’s downgraded South Africa’s long-term foreign and local currency debt ratings to Ba1 (one notch below investment grade) in March 2020, placing the country at junk status across all three major rating agencies. This final step reflected Moody’s view that institutional strength had weakened, growth prospects were reduced, and fiscal strength continued to erode. The cumulative effect of economic stagnation, governance issues, and political instability prompted these successive downgrades.