Following from the sub-investment ratings downgrade by Standard & Poor’s (S&P) earlier this week, Fitch ratings agency has followed suit, downgrading South Africa’s foreign and local currency rating to junk status.
Explaining the decision, Fitch noted: “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.
“In Fitch's view, the cabinet reshuffle, which involved the replacement of the finance minister, Pravin Gordhan, and the deputy finance minister, Mcebisi Jonas, is likely to result in a change in the direction of economic policy. 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 ratings agency added: “The new finance minister has stated that he does not intend to change fiscal policy and remains committed to expenditure ceilings that have been a pillar of fiscal consolidation. However, 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. This could put upward pressure on general government debt, which at an estimated 53% of GDP at end-March 2017 was already slightly above the 'BB' category median of 51%.”
With two ratings agencies downgrading South Africa to sub-investment grade, it is likely that borrowing costs will increase. Furthermore, it may result in companies disinvesting from South Africa, as some mandates prevent companies from investing in sub-investment grade countries.
Ratings agency Moody’s is yet to announce its ratings decision for South Africa.