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Fitch downgrades S. Africa to junk status  

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.

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