Picture: Alessandro Garofalo
Picture: Alessandro Garofalo

Fitch follows S&P, downgrades SA

By Nicola Mawson Time of article published Apr 7, 2017

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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.

BUSINESS REPORT ONLINE 

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