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Fitch has become the second major ratings agency this week to cut the South African government’s sovereign credit rating to junk status, after the ousting of respected finance minister Pravin Gordhan knocked confidence in President Jacob Zuma’s commitment to sound economic policies.
S&P downgraded the government’s foreign currency debt to junk status on Monday, but Fitch went one step further today by also cutting the country’s rand-denominated debt to BB+. The rand weakened a little in response.
President Zuma and his supporters have attempted to reassure investors since the first downgrade, saying the Treasury’s “policy orientation remains the same”. However, Fitch was unconvinced, saying in a statement that it believes the reshuffle “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. 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 ratings agency also warned that tensions within the ruling African National Congress could create distractions for the government. Mr Zuma’s late-night purge of cabinet opponents prompted unprecedented backlash from senior figures in the party, though the ANC’s secretary-general said earlier this week that “public dissonance on [the reshuffle] was a mistake that should not be committed again”.
Again, however, Fitch was not confident that problems will go away:
The tensions within the ANC will mean that political energy will be absorbed by efforts to maintain party unity and fend off leadership challenges and to placate rising social pressures for addressing inequality, poverty and weak public service delivery. The Treasury’s ability to withstand departmental demands for increased spending may also weaken.
Fitch was not scheduled to review South Africa’s rating until the summer, though the agency warned last week that Mr Zuma’s reshuffle could affect its rating.