Fitch Joins S&P In Downgrading South African Credit Rating To Junk Status

Written by Reuters

Ratings agency Fitch downgraded South Africa’s credit rating to sub-investment grade on Friday, saying a recent cabinet reshuffle that saw the country’s respected finance minister fired will likely result in a change in economic policy direction, Reuters reported.

Downgrades to junk — first by S&P on Monday and today by Fitch — could see South Africa fall off some global bond indexes and force international funds that are prohibited from holding sub-investment grade securities to sell, Eyewitness News reported.

South African President Jacob Zuma fired Finance Minister Pravin Gordhan, who had urged budget restraint and improved management at state companies, in a cabinet reshuffle on March 31. This set off South Africa’s worst political crisis in almost a decade and triggered calls from top officials for him to resign, according to Bloomberg:

Investors regard the firing as a blow to an economy growing at the slowest pace since a 2009 recession and grappling with 27 percent unemployment and the rand and bonds plunged.

Fitch’s downgrade on both foreign and local currency debt follows S&P Global Ratings, which also cut South African foreign debt to “junk” status.

Fitch’s move will almost certainly lead to a rise in government debt-servicing costs, Reuters reported. This will mean less money for critical services such as housing, education and sanitation, which could result in even more protests over service delivery that have already rocked towns across the South Africa.

“It is very disappointing, but unfortunately not so too unpredictable,” said Nedbank chief economist Dennis Dykes. “Once S&P has moved it does put a littler bit of pressure on the other rating agencies. Clearly, they also want to move in the interests of investors that actually follow their ratings.”

On March 31 Zuma appointed 10 new ministers to the national executive committee, replacing Finance Minister Pravin Gordhan and and Deputy Finance Minister Mcebisi Jonas.

Six top ANC leaders disapproved of the way the reshuffle was handled, The Citizen reported.

Deputy President Cyril Ramaphosa, Secretary General Gwede Mantashe and Treasurer General Zweli Mkhize criticized the move, saying the reshuffle was handled in a chaotic manner.

South Africans have not benefited from political liberation attained in 1994, Zuma said in his February 2017 State of the Nation Address. As a result there still is a huge wealth gap between black and white households.

Zuma’s presidency has been riddled with corruption accusations and money-related scandals.

He has called for radical economic transformation, and this includes dealing with dominance by a handful of players in certain sectors of the economy, Huffington Post reported.

Since being fired, Gordhan has refrained from criticizing Zuma, Moneyweb reported:

“Whilst ‘radical economic transformation’ has become a useful populist slogan, there is a bit of truth in it,” Gordhan said. “Unless we are indeed transformative, and we are radical in the sense that we get to the roots of the problem, and radical in the sense that we lend a new sense of urgency to bring about economic change and greater levels of social justice, we won’t be solving South Africa’s problems, and nor are we going to be able to blame somebody else for those problems either.”

Following the government reshuffle, fiscal consolidation in South Africa will be less of a priority given the president’s focus on radical socioeconomic transformation, Fitch said, according to Eyewitness News:

This means that renewed shortfalls in revenues, for example as a result of lower-than-expected GDP growth, are less likely to be compensated by expenditure and revenue measures. This could put upward pressure on general government debt, which at an estimated 53 percent of GDP at end-March 2017 was already slightly above the ‘BB’ category median of 51 percent.

The tensions within the ANC will mean that political energy will be absorbed by efforts to maintain party unity and fend off leadership challenges and to placate rising social pressures for addressing inequality, poverty and weak public service delivery.

The Treasury’s ability to withstand departmental demands for increased spending may also weaken. Political uncertainty was already an important factor behind weak growth last year, as in Fitch’s assessment it has affected the willingness of companies to invest.

The agency believes that the Cabinet reshuffle will further undermine the investment climate. Fitch forecasts GDP growth of 1.2 percent in 2017 and 2.1 percent in 2018, but the reshuffle has raised downside risks.