Cape Town – Ratings agency S&P Global Ratings on Monday downgraded South Africa to sub-investment grade and said a massive Cabinet reshuffle shortly after midnight on Friday has put policy continuity at risk.
The decision follows a Cabinet reshuffle which claimed the jobs of Finance Minister Pravin Gordhan and his deputy Mcebisi Jonas.
Barely 24 hours into his new job as Minister of Finance, Malusi Gigaba clarified two important aspects of his new appointment which represent major shifts from his predecessor. Both aspects of the new Gigaba era should leave South Africans concerned and calling for greater scrutiny than ever before on government, political analyst Daniel Silke earlier wrote on Fin24.
“Firstly, Gigaba unambiguously placed the highly contentious nuclear power build project firmly back on the agenda.
“The second aspect of the first 24 hours of Gigaba’s reign is perhaps more worrying. At his first media briefing, Gigaba expressed a more populist view of not only economic policy but also his world view,” Silke wrote.
The rand reacted immediately to trade at R13.71/$. By 17:53 it changed hands at R13.67 to the greenback.
S&P said the executive changes initiated by President Jacob Zuma have put at risk fiscal and growth outcomes.
“We assess that contingent liabilities to the state are rising,” the global ratings agency said in a statement.
S&P lowered the long-term foreign currency sovereign credit rating on the Republic of South Africa to ‘BB+’ from ‘BBB-‘and the long-term local currency rating to ‘BBB-‘ from ‘BBB’.
It also 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.
In addition, 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.
“This has increased the likelihood that economic growth and fiscal outcomes could suffer. The rating action also reflects our view that contingent liabilities to the state, particularly in the energy sector, are on the rise, and that previous plans to improve the underlying financial position of Eskom may not be implemented in a comprehensive and timely manner.
“In our view, higher risks of budgetary slippage will also put upward pressure on South Africa’s cost of capital, further dampening already-modest growth.”