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.
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.”
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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.
BUSINESS REPORT ONLINE