Cabinet reshuffle places SA firmly in junk status crosshairs

03 April 2017

As South Africa reels from the news of another Cabinet reshuffle overnight, the damage to business confidence and a renewed threat of a ratings downgrade should not be underestimated.

After a week of speculation, President Jacob Zuma on Thursday night made sweeping changes to his Cabinet, including the axing of Finance Minister Pravin Gordhan, who was replaced by Malusi Gibaba.“The country was just starting to get back on track this year after a difficult 2016 and this decision had left a wake of uncertainty and instability.

“What people are failing to immediately see is [that the] real cost is the damage to business confidence,” Econometrix director and chief economist Dr Azar Jammine said at a BMI Building Research Strategy Consulting Unit strategic forum on Friday.

Business conditions have become increasingly challenging, with a surprise short-term switch of Finance Ministers in 2015 resulting in the loss of billions of rands and dealing a severe blow to the country’s economy, while the country staved off a looming downgrade to junk status in a sluggish economy and muted investor sentiment.

However, short-term positive trends had started to emerge this year and, until Friday, the rand had been improving against the dollar, and inflation remained stable, he said.The latest political shenanigans had reignited the growing possibility of a sovereign ratings downgrade for South Africa.“Junk status is a very real [possibility],” he warned.

 South Africa last year narrowly missed being downgraded to investment junk status, after global ratings agency Standard & Poor’s (S&P’s) retained South Africa’s sovereign credit rating at its current BBB- level – one notch above junk and the lowest investment grade rating.

The decision by S&P’s echoed that of Fitch, which affirmed South Africa’s investment-grade credit rating at one notch above junk, but changed its outlook to negative from stable, and Moody’s, which currently rates South Africa two levels above junk.

Moody’s will be reviewing South Africa again next week; however, its rating of the country two notches above junk is not yet expected to have as much of an impact as a downgrade by S&P’s or Fitch will have.“Gordhan was standing between [South Africa] and a downgrade,” said University of the North West political and policy specialist Theo Venter.

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