President Jacob Zuma’s shock decision to fire his finance minister and stack his cabinet with loyalists may have seemed like good politics, but it’s led to an immediate downgrade of the nation’s credit rating by S&P Global Ratings that will cost an already moribund economy dearly.
The decision by S&P to remove South Africa’s investment-grade rating for the first time in 17 years may be followed by downgrades by Moody’s Investors Service and Fitch Ratings. It comes amid a chorus of criticism within Zuma’s ANC over his decision to fire Pravin Gordhan.
“The cost of the downgrade to all South Africans, the poor in particular, will be felt in higher interest rates, higher inflation, higher food prices and lower economic growth which will reduce investment and employment,” Banking Association of South Africa MD Cas Coovadia said in e-mailed statement. “President Zuma has done South Africa great harm, and should be held to account by all South Africans.”
Zuma’s move to bolster his cabinet with supporters as he seeks to secure his choice as successor as leader of the ANC in December set off South Africa’s worst political crisis in almost a decade. The president has drawn rare public criticism by top party officials, including his deputy, Cyril Ramaphosa, and former President Kgalema Motlanthe on Monday called on Zuma to step down. A wider group of ANC leaders will meet Tuesday to discuss the reshuffle, while opposition parties are pushing for a vote of no-confidence in parliament.
The rand, which was the world’s best performer this year through to 24 March, has dropped 10% against the dollar since Gordhan was recalled from a roadshow to London ahead of his removal. It’s erased all its 2017 gains for the biggest decline among more than 140 currencies monitored by Bloomberg since 27 March. The yield on the benchmark government rand bonds due December 2026 rose 18 basis points to 9,16%, a four-month high.
Malusi Gigaba, who replaced Gordhan, is a former home affairs minister with no experience in finance.
“I don’t ask questions, I simply comply with the instructions given to me,” he told reporters in Pretoria before the unscheduled S&P announcement on Monday. “There’s so much going on in our country that changing a certain individual won’t cause a credit downgrade.”
Hours later, S&P did exactly that and Moody’s Investors Service, which rates South Africa’s debt at two levels above junk and with a negative outlook, put the nation on review for a downgrade. The timing and scope of the reshuffle raises questions over the signal they send regarding the prospects for ongoing reforms, Moody’s said Monday.
Ratings risk
“It is far easier to be downgraded to junk status than it is to be upgraded to investment grade,” Nedbank analyst Reezwana Sumad said in an e-mailed note to clients. “It may take on average five years to be upgraded back into investment grade. Also, Fitch tends to follow any S&P rating change.”
South Africa has enjoyed investment-grade standing at Moody’s since 1994, when the ANC came to power under Nelson Mandela. The other two ratings companies upgraded it above junk in 2000.
Zuma’s decision first to recall Gordhan on 27 March from a series of meetings with investors in the UK and the US and then to fire him early Friday came after the two feuded for months over over the affordability of building nuclear power plants and the management of state-owned companies.
Zuma told his party’s leaders that Gordhan was divisive in the cabinet and blocked other ministers’ projects, according to a person with knowledge of their meeting.
For an economy growing at the slowest pace since the 2009 recession and grappling with 27% unemployment, S&P’s action was a blow.
“The downgrade reflects our view that the divisions in the ANC-led government that have led to changes in the executive leadership, including the finance minister, have put policy continuity at risk,” S&P said. “This has increased the likelihood that economic growth and fiscal outcomes could suffer.”
Motlanthe in an interview on Monday said Zuma doesn’t understand how his actions can influence decisions by rating companies.
“He doesn’t come across as someone who thinks about what is in the national interests or what is in the organisational interests, but seems to be driven by an agenda based on vested interests,” Motlanthe said. “That’s why to an observer there’s a measure of irrationality to what he does.” — (c) 2017 Bloomberg LP
