Fitch downgrades SA to junk status

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A picture illustration shows a South African two Rand coin April 4, 2017.

JOHANNESBURG - Fitch ratings agency has downgraded South Africa's foreign and local currency ratings to sub investment grade, or junk status.

The agency says the country's long-term ratings downgrade follows recent political events, including the Cabinet reshuffle, which Fitch believes 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 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,” the agency said in a statement. 

Fitch said differences over South Africa’s nuclear programme may have contributed to Zuma’s cabinet reshuffle.

“Under the new cabinet, including a new energy minister, the programme is likely to move relatively quickly. The state-owned electricity company, Eskom, has already issued a request for information for nuclear suppliers and is expected to issue a request for proposals for nuclear power stations later this year.

“The treasury under its previous leadership had said that Eskom could not absorb the nuclear programme with its current approved guarantees, so the treasury will likely have to substantially increase guarantees to Eskom.”

Fitch said this would increase contingent liabilities, which are already sizeable.

“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, which at an estimated 53% of GDP at end-March 2017 was already slightly above the 'BB' category median of 51%.”

Fitch said it believed that political energy would be absorbed by efforts to maintain party unity and fight calls for the president to step down.

It says if the country’s investment climate improves and there's growth, the next review could be positive.

Fitch is the second rating agency to downgrade the country to junk status after Standard and Poor.