Ratings agency Moody’s Investors Service lowered its outlook on SA’s credit rating from stable to negative on Friday, signaling that the country has an 18-month window to get its house in order to avoid being cut to junk status.

The ratings agency kept SA’s debt at Baa3, one notch above sub-investment grade, or junk.

The change in outlook was largely expected by the market but raises the likelihood that SA government debt could be downgraded.

Moody’s said in a release late on Friday night that the change in outlook to negative “reflects the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures”.

“The challenges the government faces are evident in the continued deterioration in SA’s trend in growth and public debt burden, despite ongoing policy responses,” it said.

The financial stress for state-owned enterprises (SOEs), in particular Eskom, continued to require “sizeable” ongoing support from the government, Moody’s said. It warned that “a credible fiscal strategy to contain the rise in debt” in next year’s February budget will be key to SA retaining its rating.

But the agency also flagged the “rising concern that the government will not find the political capital to implement the range of measures it intends, and that its plans will be largely ineffective in lifting growth”.

SA’s long-diagnosed problems of structurally high unemployment and income and wealth inequality are longstanding and deeply-entrenched constraints on the country's growth potential. But “resistance to reforms from key stakeholders limit the government's room to adopt and implement structural reforms”, Moody’s noted.

A cut to sub-investment grade would mean SA will be forced out of important global bond indices targeted by large international institutional investors, such as the FTSE World Government Bond Index (WGBI). The expected outflows of capital — which some estimates have put at around $15bn, according to Bloomberg — would put pressure on the currency, raise the cost of government debt and see costs across the economy rise.

In a statement responding to the decision finance minister Tito Mboweni said while he had hoped for a different outcome, he acknowledged the rating action by Moody’s “with a heavy heart”.

“Fellow South Africans, now is the time to roll up our sleeves and do what we have to do. It is now or never. We need all hands on deck. Government, labour, business and civil society, we need each other more than ever before,” Mboweni said.