Johannesburg – The second of the big three international ratings agencies has moved, with Fitch downgrading SA to junk.
This follows S&P’s move on Monday to drop SA to junk status. Fitch’s move means that now only Moody’s call is outstanding. Moody’s, which has SA two notches above junk, was set to make a call on Friday, but has now postponed this for as many as 90 days. Earlier this month, it put the country on review for a possible downgrade.
A credit rating at junk means that it will be more costly to borrow, and it will also weigh on the rand, increasing the cost of imported items. It could also see the South African Reserve Bank hiking the prime lending rate above 10.25 percent.
On Friday, Fitch – giving SA a stable outlook – said recent political events, including a Cabinet reshuffle, will weaken standards of governance and public finances.
S&P cited the Cabinet shuffle, which saw nine ministers including internationally respected then Finance Minister Pravin Gordhan axed. Gordhan was replaced by Malusi Gigaba, who was seconded from Home Affairs.
Fitch says this shuffle is “likely to result in a change in the direction of economic policy”.
“The reshuffle partly reflected efforts by the out-going finance minister to improve the governance of state-owned enterprises (SOEs). The reshuffle is likely to undermine, if not reverse, progress in SOE governance, raising the risk that SOE debt could migrate onto the government's balance sheet,” it says.
Post S&P’s move, Gigaba said he was committed to working with all stakeholders to boost economic growth and bring balance to the fiscus.
SA grew at a mere 0.3 percent last year, and is expected to just break a percent in gross domestic product (GDP) gains this year.
Fitch also cites Eskom’s financial position, noting that a move into nuclear – which is increasingly looking certain – will require more government guarantees, which will weigh on SA’s monetary liabilities.
Read also: S&P drops Eskom to 'highly speculative'
“The new finance minister has stated that he does not intend to change fiscal policy and remains committed to expenditure ceilings that have been a pillar of fiscal consolidation. However, Fitch believes that following the government reshuffle, fiscal consolidation will be less of a priority given the president's focus on ‘radical socioeconomic transformation’.”
“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.”
Government debt was around 53 percent of gross domestic product at the end of March.
Fitch adds 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 [National] Treasury's ability to withstand departmental demands for increased spending may also weaken.”
Fitch’s rating comes on the same day that hundreds of thousands of South Africans are marching across the country in a bid to have Zuma removed as President.
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