The agency cited executive changes initiated by President Jacob Zuma last week as having put the country at risk of fiscal and growth outcomes.
It said contingent liabilities to the state had risen extensively in South Africa as a result.
“We are therefore lowering our long-term foreign currency sovereign credit rating on the Republic of South Africa to ‘BB+’ from ‘BBB-’ and the long-term local currency rating to ‘BBB-’ from ‘BBB’,” SNP said.
“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 economic growth outcomes more than we currently project.”
The downgrade came as the rand extended its losses against the dollar, falling 1.5 percent to two-month lows in early trade yesterday.
An economist told Business Report that the market had long factored in the possibility of the downgrade.
The rand at R13.4446 to the dollar at the opening of the JSE yesterday, was falling to R13.6945 by the afternoon before clawing back some of the losses during the day.
By 5.30pm, the rand was bid at R13.7188.
Banking stocks also continued to tank yesterday, with Nedbank down 1.9 percent to R236.80, followed by FirstRand at 1.32 percent lower to R45.75 and Standard Bank slumping 0.17 percent to R143.50.
The banking shares have fallen more than 7percent since Thursday night’s cabinet reshuffle which saw Gordhan and his deputy Mcebisi Jonas replaced by Malusi Gigaba and Sifiso Buthelezi respectively.
Only Barclays rose 2.5 percent to R143 yesterday.
Read also: 'Executive changes' risk growth – S&P
At the same time, spot gold slumped 0.2 percent to $1246.84 (R16705.80) per ounce on a firm dollar and as investors booked profits after bullion recorded its best quarter in a year on Friday.
The yields on the country’s benchmark 10-year-bonds, which rise when prices fall, hit its highest in about two weeks according to Tradeweb data.
The average yield spread of South African sovereign bonds over US Treasuries rose 3 basis points (bps) to 272bps, the highest since early January.
Five-year credit default swops were trading at 218bps, according to IHS Markit, having blown out to 219bps on Friday, the highest since mid-December.
Last week the rand fell more than 8 percent against the dollar as merging market assets benefited from strong manufacturing activity data, which reinforced the view that the global economic recovery was gaining momentum.
MSCI’s benchmark emerging equities index rose 0.4 percent, with Poland and Hungary shares gaining 0.6 to 0.9 percent and Russian shares up 0.5 percent.
Volatile trading in the rand has since underlined Gordhan’s reputation among investors as a guardian of policymaking stability in South Africa.
The currency gained as much as 1.7 percent on Thursday after a flurry of news suggesting there was resistance to Zuma’s plan within the ANC as well as allied and opposition parties.
Fitch Ratings now rates South Africa “BBB-” with a negative outlook - the lowest possible investment-grade rating, with the next likely adjustment being downward to so-called “junk status”.
In November Fitch said that it could downgrade South Africa’s rating if continued political instability adversely affects governance, the economy or public finances.
More recently, in presentations delivered in mid-March 2017, S&P Global Ratings reiterated that it could downgrade South Africa if political interference weakens key institutions.
Additional reporting by Reuters.