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Fitch has weighed in on the recent political turmoil in South Africa, and, while the ratings agency stopped short of taking any immediate action, it has highlighted the increased likelihood of negative developments for the government’s sovereign credit rating.

Fitch currently rates the government’s debt at BBB-, one notch above junk territory. Ex-finance minister Pravin Gordhan’s efforts to shore up the South African economy helped the country to hold on to its investment-grade ratings last autumn, but Fitch warned at the time that further political uncertainty or negative economic developments could lead to a downgrade.

In an unscheduled update today, Fitch said it believes that both weaker growth and further political uncertainty are now more likely as a result of Mr Gordhan’s ousting in a late-night cabinet reshuffle.

The ratings agency said:

We believe fiscal consolidation is likely to become less of a priority and the move to improve transparency and governance of state-owned enterprises will be halted. State-owned enterprises’ liabilities, and therefore contingent liabilities to the government, will probably grow more rapidly, particularly if a plan to postpone the commissioning of new nuclear power stations to 2037 is reversed.

The political backdrop increases the risk that the government will resort to costly expenditure measures or legislation that will weaken economic growth to stabilise its support.

These developments, together with relevant policy announcements from the new cabinet, could result in Fitch reviewing its ratings on the South Africa sovereign.

A number of analysts have predicted that it will now be impossible for South Africa to keep its investment-grade status. Peter Attard Montalto at Nomura described Mr Zuma’s reshuffle as “an attack on the institution of the National Treasury” which “will trigger multiple downgrades”.

Even the country’s central bank governor has hinted that downgrades could be coming, telling reporters yesterday that “it is always useful that [ratings agencies] have got certainty about what the political trajectory of the country is, what the economic trajectory is”.

South African government bonds have been trading in record volumes as a result of the uncertainty, with the country’s benchmark 10-year bond among the most heavily-traded sovereign bonds in the European markets on Friday, according to Trax, a subsidiary of bond-trading platform MarketAxess.

The first major test for the government will come next Friday, when Moody’s – which currently gives South Africa a higher rating than Fitch or fellow ratings agency S&P – is due to decide on its rating. Fitch’s next scheduled review of South Africa’s debt is expected to come in early June.

Copyright The Financial Times Limited 2017. All rights reserved.
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