S&P downgrades South Africa's credit rating to junk after cabinet reshuffle

By bne IntelliNews April 4, 2017

Standard & Poor’s ratings agency has cut South Africa's sovereign credit rating to 'BB+' from 'BBB-' and the long-term local currency rating to 'BBB-' from 'BBB', both with a negative outlook, saying the decision to downgrade it to junk for the first time in 17 years has been taken on the back of political and institutional uncertainty that pose a risk to fiscal policy.

The decision follows a cabinet reshuffle by President Jacob Zuma in which the respected finance minister Pravin Gordhan and his deputy Mcebisi Jonas were fired, with the former ANC Youth League president Malusi Gigaba replaced Pravin Gordhan as finance minister. The move has cast further doubt on the economy's prospects by investors, who have been selling South African assets over the uncertainty.

At the same time, Moody's Investors Service also placed its 'Baa2' long-term issuer and senior unsecured bond ratings of the government of South Africa on review for downgrade, saying the decision to initiate a review for downgrade was prompted by the abrupt change in leadership of key government institutions.

All eyes will now be on Fitch Ratings to see its decision in light of the reshuffle.

South Africa's '(P) Baa2' Senior Unsecured Shelf and MTN program ratings were also placed by Moody's under review for downgrade, as was the '(P)P-2' Senior Unsecured Short-Term rating. It has also placed on review for downgrade the 'Baa2' senior unsecured rating of the ZAR Sovereign Capital Fund Propriety Limited, which is fully and unconditionally guaranteed by the Republic of South Africa.

S&P lowered the short-term foreign currency rating to 'B' from 'A-3' and the short-term local currency rating to 'A-3' from 'A-2'. The outlook on all the long-term ratings is negative. At the same time, S&P lowered the long-term South Africa national scale rating to 'zaAA-' from 'zaAAA', and affirmed the short-term national scale rating at 'zaA-1'.

"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," S&P said in a statement.

The rating agency also assigned South Africa a negative outlook, saying this reflected its view that political risks will remain high this year, and that "policy shifts are likely which could undermine fiscal and growth outcomes more than we currently project".

Paying higher debt costs would mean less money for critical services such as housing, education and sanitation, which could incite more protests that have rocked towns across the country, it noted.

Tim Ash of Bluebay Asset Management said: "Let's see if the loss of investment grade status has any impact on the political process in South Africa itself. Guess Zuma must have assumed this might have been one of the consequences of his removing Gordhan - and is willing to tough it out. Political impact might depend now on market impact - if still muted the political impact might be limited still in short term at least."

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