S&P downgrades South Africa to junk status

Following recent changes to the Cabinet by President Jacob Zuma, Standard and Poor’s on Monday announced it had downgraded South Africa to sub-investment grade.

The international ratings agency said it was their opinion that “the executive changes initiated by President Zuma have put at risk fiscal and growth outcomes”.

The news comes as pressure on Zuma mounts to resign from opposition parties, civil society groups, and even those within his own party.

It emerged on Monday that the ruling African National Congress integrity commission, chaired by one of the last two living members of the Rivonia trial following the death of struggle stalwart Ahmed Kathrada last week, would meet with Zuma and ask him for a second time to step down.

The reshuffle split the party, with even senior ANC leaders, including deputy president Cyril Ramaphosa, secretary general Gwede Mantashe, and treasurer general Zweli Mkhize voicing their displeasure at the reshuffle – specifically the axing of Finance Minister Pravin Gordhan and his deputy Mcebisi Jonas – two of the most trusted cabinet ministers in many circles.

In what on union leader described as “self-inflicted pain” and a consequence of bad leadership, S&P lowered the country’s long-term foreign currency sovereign credit rating from ‘BBB-‘ to ‘BB+’, which is one notch below investment grade, or so-called junk status.

The agency also cut South Africa’s long-term local currency rating to ‘BBB-‘ from ‘BBB’.

The outlook on all the long-term ratings was negative, the agency said, adding that it had assessed that contingent liabilities to the state were rising.

Removing any doubts about the connection to last week’s late-night cabinet reshuffle, the agency said the downgrade “reflects our view that the divisions in the ANC-led government that have led to changes in the executive leadership, including the finance minister, have put policy continuity at risk”.

“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 statement added.

S&P singled out the energy sector among these “rising contingent liabilities”, expressing the concern that “previous plans to improve the underlying financial position of Eskom may not be implemented in a comprehensive and timely manner”.

The agency said it was also of the view that higher risks of budgetary slippage would put upward pressure on South Africa’s cost of capital, “further dampening already-modest growth”.

“Internal government and party divisions could, we believe, delay fiscal and structural reforms, and potentially erode the trust that had been established between business leaders and labour representatives (including in the critical mining sector).”

S&P noted that negative sentiment might result in businesses holding back investments that would otherwise have supported economic growth.

“We think that ongoing tensions and the potential for further event risk could weigh on investor confidence and exchange rates, and potentially drive increases in real interest rates.”

S&P also mentioned increased risk that public enterprises would “need further extraordinary government support”. The agency estimates that “guarantee utilisations”, dominated by Eskom, would reach R500 billion by 2020.

The country’s pace of economic growth also remained a weakness, the agency said.

S&P added that if fiscal and macroeconomic performance deteriorated substantially from its baseline forecasts, a further downgrade could be on the cards.

On the other hand, it added, “we could revise the outlook to stable if we see political risks reduce and economic growth and/or fiscal outcomes strengthen compared to our baseline projections”.

Treasury released a statement shortly after the S&P announcement, noting the downgrade, adding “government has been, and will remain, committed to a measured fiscal consolidation that stabilises the rise in public debt”.

Zuma announced yet another reshuffle of his Cabinet in the early hours of Friday which saw Gordhan axed as finance minister and Malusi Gigaba announced as his replacement.

Gordhan’s deputy Jonas also got the boot and was replaced with Sfiso Buthelezi.

– Additional reporting by African News Agency