Johannesburg - South African President Jacob Zuma’s shock
decision to fire his finance minister and stack his cabinet with loyalists may
have seemed like good politics, but it’s led to an immediate downgrade of the
nation’s credit rating by S&P Global Ratings that will cost an already
moribund economy dearly.
The decision by S&P to remove South Africa’s
investment-grade rating for the first time in 17 years may be followed by
downgrades by Moody’s Investors Service and Fitch Ratings. It comes amid a
chorus of criticism within Zuma’s African National Congress over his decision
to fire Pravin Gordhan.
“The cost of the downgrade to all South Africans, the
poor in particular, will be felt in higher interest rates, higher inflation,
higher food prices and lower economic growth which will reduce investment and
employment,” Banking Association of South Africa Managing Director Cas Coovadia
said in emailed statement. “President Zuma has done South Africa great harm,
and should be held to account by all South Africans.”
Zuma’s move to bolster his cabinet with supporters as he
seeks to secure his choice as successor as leader of the ANC in December set
off South Africa’s worst political crisis in almost a decade. The president has
drawn rare public criticism by top party officials, including his deputy Cyril
Ramaphosa, and former President Kgalema Motlanthe on Monday called on Zuma to
step down. A wider group of ANC leaders will meet Tuesday to discuss the
reshuffle, while opposition parties are pushing for a vote of no-confidence in
parliament.
Rand weakens
The rand, which was the world’s best performer this year
through March 24, has dropped 10 percent against the dollar since Gordhan was
recalled from a roadshow to London ahead of his removal. It’s erased all its
2017 gains for the biggest decline among more than 140 currencies monitored by
Bloomberg since March 27. The yield on the benchmark government rand bonds due
December 2026 rose 18 basis points to 9.16 percent, a four-month high.
Malusi Gigaba, who replaced Gordhan, is a former home
affairs minister with no experience in finance.
Read also: Moody's places SA on review
“I don’t ask questions, I simply comply with the
instructions given to me,” he told reporters in Pretoria, the capital, before
the unscheduled S&P announcement on Monday. “There’s so much going on in
our country that changing a certain individual won’t cause a credit downgrade.”
Hours later S&P did exactly that and Moody’s
Investors Service, which rates South Africa’s debt at two levels above junk and
with a negative outlook, put the nation on review for a downgrade. The timing
and scope of the reshuffle raises questions over the signal they send regarding
the prospects for ongoing reforms, Moody’s said Monday.
Ratings risk
“It is far easier to be downgraded to junk status than it
is to be upgraded to investment grade,” Nedbank analyst Reezwana Sumad said in
an emailed note to clients. “It may take on average five years to be upgraded
back into investment grade. Also, Fitch tends to follow any S&P rating
change.”
South Africa, the continent’s most-industrialized
country, has enjoyed investment-grade standing at Moody’s since 1994, when the
ANC came to power under Nelson Mandela. The other two ratings companies
upgraded it above junk in 2000.
Zuma’s decision first to recall Gordhan on March 27 from
a series of meetings with investors in the UK and the US and then to fire him
early Friday came after the two feuded for months over the affordability of
building nuclear power plants and the management of state-owned companies.
Zuma told his party’s leaders that Gordhan was divisive
in the cabinet and blocked other ministers’ projects, according to a person
with knowledge of their meeting.
Slow growth
For an economy growing at the slowest pace since the 2009
recession and grappling with 27 percent unemployment, S&P’s action was a
blow.
“The downgrade reflects our view that the divisions in
the ANC-led government that have led to changes in the executive leadership,
including the finance minister, have put policy continuity at risk,” S&P
said. “This has increased the likelihood that economic growth and fiscal
outcomes could suffer.”
Motlanthe, in an interview Monday at Bloomberg’s office
in Johannesburg, said Zuma doesn’t understand how his actions can
influence decisions by rating companies.
“He doesn’t come across as someone who thinks about what
is in the national interests or what is in the organizational interests, but
seems to be driven by an agenda based on vested interests,” Motlanthe said.
“That’s why to an observer there’s a measure of irrationality to what he does.”