Second Rating Agency downgrades Country to Junk Status

Fitch Ratings has become the second global ratings firm to downgrade South Africa to sub-investment grade, the group confirmed on this morning. According to Fitch, the downgrade is primarily due to president Jacob Zuma’s recent cabinet reshuffle, which it says will weaken standards of governance and public finances.

Fitch’s rating for South Africa’s senior unsecured foreign- and local-currency bonds have been downgraded to ‘BB+’ from ‘BBB-‘. The short-term foreign-and local-currency IDRs (issuer default ratings) and the rating on the short-term local-currency securities have been downgraded to ‘B’ from ‘F3’. The country ceiling has been revised down to ‘BBB-‘ from ‘BBB’. The outlook has been put at ‘stable’.

The downgrade follows on the rating cut at the start of the week by Standard & Poor’s (S&P) Global, which moved ahead of its scheduled rating review later in April to drop the axe.

South Africa’s ratings downgrades come as a direct result of the axing of former finance minister Pravin Gordhan and his deputy, Mcebisi Jonas, in a cabinet reshuffle last week.

The move has been seen by many as the final grab for National Treasury by president Jacob Zuma, where loyalists have been deployed to rubber stamp contracts Zuma needs to get approved to maintain his network of patronage, and secure a victory at the ANC elective conference at the end of the year.

“The downgrade of South Africa’s Long-Term IDRs reflects Fitch’s view that recent political events, including a major cabinet reshuffle, will weaken standards of governance and public finances. “In Fitch’s view, the cabinet reshuffle, which involved the replacement of the finance minister, Pravin Gordhan, and the deputy finance minister, Mcebisi Jonas, is likely to result in a change in the direction of economic policy,” the ratings agency said.

“Political uncertainty was already an important factor behind weak growth last year, as in Fitch’s assessment it has affected the willingness of companies to invest. The agency believes that the cabinet reshuffle will further undermine the investment climate.”

Fitch forecasts GDP growth of 1.2% in 2017 and 2.1% in 2018, but the reshuffle has raised downside risks.” The rand spiked to ZAR 13.80 versus the US Dollar on the news, but is not a massive departure from the levels it has been trading at for much of the week.

According to economists, this is because downgrades have been priced into the currency for some time, as they have been expected since 2016. The only other ratings firm to still make a move on SA’s credit rating is Moody’s, which has the country still set two notches above junk. The group delayed its review of the country for a period of at least 30 days.

The move to downgrade both foreign and local-currency IDRs by Fitch puts South Africa in an even worse position than with the S&P downgrade, which left the local currency rating above junk.

Treasury has tried to downplay the effects of junk status by noting that only 10% of South Africa’s debt is carried in foreign currency, but failed to mention that the international borrowing ability of South Africa has gone or been made very expensive, which puts a question mark behind more than one of the infrastructure projects. The last time South Africa was rated “Junk” was at the end of last century#s Nineties before Trevor Manuel took over as can be seen on the chart!

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