Johannesburg – In a surprise move on Monday night,
S&P downgraded South Africa’s credit rating to junk, less than a week after a Cabinet shuffle.
The rating, which comes after President Jacob Zuma unceremoniously
axed Finance Minister Pravin Gordhan and his deputy late last Thursday –
sending the rand down at least 5 percent – is almost three months ahead of its
scheduled ratings action.
In a statement, the global credit agency, says “the
executive changes initiated by President Zuma have put at risk fiscal and
growth outcomes”.
Zuma instituted a wide-ranging Cabinet reshuffle last
week, which saw nine ministers lose their posts.
S&P had SA a notch above junk status – non-investment
grade – and was due to reassess the country in June. Moody’s, which rates SA
two notches above junk, will access SA this month. Fitch also rates SA a notch
above junk, but has not yet indicated when it will reassess the country’s
rating.
Read the full statement here
A lowering to junk status means that it will be harder
and more expensive for SA to borrow money to invest in vital areas at a time
when the budget deficit and debt to gross domestic product ratio must be
carefully limited.
S&P says SA’s long-term foreign currency sovereign
credit rating was dropped to 'BB+' from 'BBB-', while the long-term local
currency rating was bumped down to 'BBB-' from 'BBB'.
The rating agency adds it also lowered the short-term
foreign currency rating to 'B' from 'A-3' and the short-term local currency
rating to 'A-3' from 'A-2'. The outlook on all the long-term ratings is
negative.
It says “the reasons for the deviation are the heightened
political and institutional uncertainties that have arisen from the recent
changes in executive leadership. The next scheduled rating publication on the
sovereign rating on the Republic of South Africa will be on June 2.”
Read also: Economy straggles in at 0.3% growth in 2016
S&P says the downgrade reflects its 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.
“This has increased the likelihood that economic growth
and fiscal outcomes could suffer.
“The rating action also reflects our view that contingent
liabilities to the state, particularly in the energy sector, are on the rise,
and that previous plans to improve the underlying financial position of Eskom
may not be implemented in a comprehensive and timely manner. In our view,
higher risks of budgetary slippage will also put upward pressure on South
Africa's cost of capital, further dampening already-modest growth.”
South Africa grew at a mere 0.3 percent last year, and
was last anticipated to come in at 1.3 percent this year, far below the 5
percent and more needed to create sustainable jobs and transform the economy.
S&P says: “The negative outlook reflects our view
that political risks will remain elevated this year, and that policy shifts are
likely which could undermine fiscal and growth outcomes more than we currently
project.”
However, S&P notes it could revise the outlook to
stable if it sees political risks reduce and economic growth, in addition to or
if fiscal outcomes strengthen compared to its baseline projections.
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