Fitch joins S&P in downgrading South Africa's credit rating to ‘junk’

7 Apr 17

Fitch Ratings has today downgraded South Africa’s credit rating to junk status following president Jacob Zuma’s dismissal of trusted finance minister Pravin Gordhan.

 

The ratings agency joins Standard & Poor’s in stripping the nation of its investment-grade credit rating, leaving only Moody’s yet to downgrade – although it is also currently reviewing its score for South Africa.

Elize Kruger, analyst at NKC Research, said the news was a “blow” to the country’s economy, which is already stuck in a “low-growth trap”.

She said the downgrade, last week’s cabinet reshuffle and the “feverish” political environment will result in a longer period of low growth and low confidence, poor employment prospects and tax revenues, and high inflation if the country’s currency weakens.

“The detailed impact of the new leadership and newly acquired junk status on the economy will unfold in the months and years to come,” she said.

“But we have already revised our GDP growth forecast for the next two years downwards (from 1.2% and 2% to 1% and 1.7% in 2017 and 2018 respectively), reflecting South Africa’s new realities.”

The removal of Gordhan, who was seen internationally as a trustworthy and reliable figure amid a chaotic political environment, is likely to damage already low investor confidence in South Africa.

Gordhan was seen as a counterbalance to Zuma, preventing the perception of corruption that has tainted the president’s administration from spreading to the treasury. Gordhan has also blocked a number of costly plans that were viewed as unnecessary, such as a nuclear power programme.

The long-running feud between the two came to a head last week when Zuma reshuffled his cabinet overnight, removing Gordhan and his deputy from their posts and replacing him with Malusi Gigaba – an ally.

The move send the rand tumbling – an eventually that Zuma was apparently prepared to withstand – and triggered large demonstrations around the country calling for the president to resign.

Fitch said it had chosen to downgrade both South Africa’s foreign and local currency ratings from BBB- to BB+ because the cabinet reshuffle in particular would “weaken the standards of governance and public finances”.

It said the direction of economic policy is likely to change, reversing progress in the governance of state-owned enterprises and pressing ahead with the government’s nuclear ambitions.

The agency said this would increase already sizeable risks, with public coffers exposed to $3.4bn worth of explicit or implicit guarantees to state-owned enterprises. It also predicted that balancing the budget will be less of a priority, and that revenues would fall. 

  • Emma Rumney

    Emma is a reporter at Cooking Recipes International. She also writes for in the UK.

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