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By Ndumiso Mlilo JOHANNESBURG, (Xinhua)
-- The international rating agency
Fitch on Friday downgraded South Africa long-term foreign and
local-currency Issuer Default Ratings (IDRs) from BBB- to BB+
(Non-investment grade speculative or junk rating).
Fitch remained the
country’s outlook stable. The issue ratings on South Africa’s
senior unsecured foreign- and local-currency bonds were also
downgraded to BB+ from BBB-.
The rating agency
said the replacement of the Finance Minister Pravin Gordhan and
his deputy, Mcebisi Jonas, is likely to result in a change in
the direction of South Africa’s economic policy.
“The downgrade of
South Africa’s long-term IDRs reflects Fitch’s view that recent
political events, including a major cabinet reshuffle, will
weaken standards of governance and public finances,” Fitch said
in a statement.
“The reshuffle
partly reflected efforts by the out-going finance minister to
improve the governance of state-owned enterprises (SOEs). 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 statement read.
Fitch said with the
new finance and energy minister, the country’s expensive nuclear
program is likely to be accelerated. They believe this would
increase contingent liabilities, which are already sizable.
The government’s
guarantee exposure to public institutions, according to the
2017/18 budget was R308.3 billion (22.34 billion U.S. dollars)
at the end March 2017, up from R255.8 billion a year earlier.
The State enterprises have additional liabilities of R463
billion in 2016 with no explicit guarantee. The government has
on many occasions bailed loss making SOEs particular the power
Eskom.
“Fitch believes that
following the government reshuffle, fiscal consolidation will be
less of a priority given the president’s focus on ‘radical
socioeconomic transformation’. 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.
“This could put
upward pressure on general government debt, which at an
estimated 53 percent of GDP at end-March 2017 was already
slightly above the BB category median of 51 percent,” Fitch
added.
The new finance
minister Malusi Gigaba has said he will continue with Gordhan’s
fiscal policy and will not have a policy shift. South Africa is
currency battling to contain the triple challenges of poverty,
unemployment and inequality.
Fitch believes that
with tensions in the ruling party, African National Congress
(ANC) and pressure in the public service delivery will force
Treasury to exceed its demands for increased spending.
Fitch also said,
“political uncertainty was already an important factor behind
weak growth last year, as in Fitch’s assessment it has affected
the willingness of companies to invest. The agency believes that
the cabinet reshuffle will further undermine the investment
climate.
Fitch forecasts GDP
growth of 1.2 percent in 2017 and 2.1 percent in 2018, but the
reshuffle has raised downside risks.”
Some issues were
raised as sensitive and could individually or collectively
result in negative rating action. These include the failure to
stabilize the government debt/GDP ratio or an increase in
contingent liabilities.
They also cited the
failure of GDP growth to recover sustainability due to sustained
uncertainty about economic policy. The rising net external debt
to levels that raise the potential for serious financing strains
on the country could result in further downgrade, noted Fitch.
This comes after
another rating agency S&P downgraded the country foreign
currency sovereign rating to sub investment early this week. S&P
also downgraded South Africa’s seven banks foreign currency
ratings to junk status on Thursday. |
