The South African rand has fallen to its lowest-level in almost four years, South African-listed equities have plummeted into correction territory, and a junk credit-rating for the country is now looming.

The widespread rush from risk assets hit commodities, including oil, copper and iron, pushing the Bloomberg Commodity Index to a 33-year low as worries grow over the demand for materials will be weakened as coronavirus drags on Chinese and global economic growth.

The rand made losses for a fifth consecutive day on Friday, falling as much as 1.4%, as commentators forecasted that plans to cut the public sector wage bill wouldn’t be enough to save the country’s credit rating.

Ratings agencies, such as Moody’s, insist that growing public sector pay is a major fiscal risk, so there was a brief moment of relief when the measure was announced in this week’s Budget. It wasn’t to last.

On closer analysis, there is now a general assessment that the wage cuts will not be able to stop a significant jump in government debt and prevent a worrying 6.8% of GDP budget deficit next fiscal year.

Moody’s is due to review South Africa‘s credit rating next month, but it is unlikely that the review will be favourable, according to many with knowledge of the matter.

Therefore, we can expect continued – perhaps intensified – downward pressure on the South African rand and stocks.

The other two major ratings companies (S&P and Fitch) have given South Africa a junk status for two years. Should Moody’s follow suit, the country would likely suffer major financial consequences.

A junk rating would come at a time when the country is facing serious, far-reaching economic issues that will be exacerbated by the coronavirus in a variety of ways – not least because China, the epicentre of the disease, is the biggest buyer of South African commodity exports.

Earlier this week, Nigel Green was quoted in the media as saying “Coronavirus and heightening geopolitical and trade tensions can be expected to drive the world to the brink of a global recession this year.”

It is likely that emerging markets, like South Africa, would be the hardest hit.

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