Fitch downgrades South Africa's credit rating to junk status

Yields on South African dollar bonds jumped to the highest this year after Fitch Ratings became the second company to cut the country's credit assessment to junk, triggering sales by some funds tracking investment-grade debt indexes.

Foreign and local currency bonds were downgraded to the "junk" level, following a similar move from the S&P rating agency earlier this week.

The agency downgraded the country's sovereign debt rating from 'BBB-' to 'BB+' but kept the outlook stable.

Standard & Poor's (S&P) downgraded South Africa to BB+ (junk status) on Monday evening, following President Jacob Zuma's reshuffle of cabinet last Thursday, which also saw the removal of Pravin Gordhan as finance minister.

But, said the Banking Association, "The fact that Fitch has directly attributed its downgrade to the actions of the president demonstrates in no uncertain terms the broad assertion that the Cabinet reshuffle‚ although the prerogative of the president‚ was not in the national interest".

The downgrades follow the ousting of finance minister Pravin Gordhan.

Differences over the expensive nuclear programme may also have contributed to the reason for the recent reshuffle, Fitch said, and under the new Cabinet, including new Energy Minister Mmamoloko Kubayi, "the programme is likely to move relatively quickly". They believe this would increase contingent liabilities, which are already sizable.

According to the 2017/18 budget, the government's guarantee exposure to public institutions was R308.3 billion at end-March 2017, up from R255.8 billion a year earlier.

The agency said this would increase already sizeable risks, with public coffers exposed to $3.4bn worth of explicit or implicit guarantees to state-owned enterprises. The government has on many occasions bailed loss making SOEs particular the power Eskom. "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." said Fitch. "The Treasury's ability to withstand departmental demands for increased spending may also weaken", the company said.

Fitch also said, "political uncertainty was already an important factor behind weak growth a year ago, as in Fitch's assessment it has affected the willingness of companies to invest".

  • Zachary Reyes