Fitch has become the second major rating agency to downgrade SA’s rating to junk status, cutting both the foreign currency and local currency ratings by one notch on Friday afternoon on concerns that recent political events, including a major Cabinet reshuffle, would weaken standards of governance and public finances and was likely to result in a change of economic policy direction.

But Fitch has put the new rating on Stable outlook, indicating it has no further downgrade plans for now, in contrast to S&P which put a negative outlook on its new rating. 

Fitch's move will almost certainly lead to a rise in government debt-servicing costs, which will mean less money for critical services such as housing, education and sanitation, which could incite even more protests over service delivery that have already rocked towns across the country.

The rand weakened on the news, to an intraday worst level of R13.8426 to the dollar after hovering around the R13.77$ level for the better part of the day.

The downgrade, which follows S&P Global Ratings downgrade of SA’s foreign currency rating on Monday night, makes Fitch the first of the agencies to cut the rating on SA’s rand denominated debt to junk status, raising the prospect of a bond sell-off by investors whose mandates restrict them to hold only investment grade assets.

S&P’s rating on SA’s local currency rand denominated bonds is one notch above its foreign currency rating so the local currency rating is still investment grade on the S&P scale, and on that of Moody’s. However, Moody’s on Monday night put SA’s local and foreign currency ratings on review for a downgrade, and is expected to announce its decision within 30 to 90 days.

About 90% of government’s borrowing is in rand, so it is less vulnerable to a foreign currency downgrade, but foreign investors hold about 35% of the government’s rand-denominated bonds, so the Fitch downgrade could also cause some outflows of capital as foreign investors sell.

The Fitch decision was despite new finance minister Malusi Gigaba’s efforts to engage with Fitch and Moody’s over the weekend after he took office, and despite his frequently expressed commitment to staying on the course of fiscal consolidation that government has promised.

Fitch said on Friday that it believed that fiscal consolidation would be less of a priority given the president’s focus on “radical economic transformation”, even though it acknowledged  that the new finance minister had stated he doesn’t intend to change fiscal policy.

All three of the agencies have cited concerns about the Cabinet reshuffle and its likely effects on fiscal discipline and on economic growth, as well as about the risk which financially ailing state owned entities could pose to the public purse.

But Fitch was the first of the three rating agencies to make explicit concerns that the firing of Pravin Gordhan as finance minister was linked to Gordhan’s efforts to improve the governance of state owned enterprises, suggesting too that it might have been linked to differences over the proposed nuclear new build.

The agency said on Friday that the Cabinet reshuffle  was “likely to undermine, if not reverse, progress in state owned enterprise governance, raising the risk that SOE debt could migrate on to the government’s balance sheet”. And it expressed concerns that the nuclear programme was likely to move relatively  quickly under a new Cabinet, which included a new energy minister, and this would mean a substantial increase in government guarantees to Eskom.  

The decision by Fitch was a setback, but government remained committed to continuing its work with business, labour and civil society to improve business confidence and implement structural reforms that would accelerate inclusive economic growth, the Treasury said on Friday.

It urged all South Africans to “remain positive to continue to work hard in turning this economy around”.

Government would ensure that nuclear procurement would be “transparent and implemented at a scale and pace that the country can afford”, the Treasury said in a statement. Government remained committed to the fiscal policy trajectory outlined in this year’s budget, as well as to implementing governance reforms in state owned companies. It would maintain the expenditure ceiling and stabilise debt, and it would fast-track the 9 point plan to boost economic growth. 

Read the full Fitch rating statement below:

Fitch by Times Media on Scribd

With Reuters

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