Following last week’s contentious Cabinet reshuffle, South Africa has been downgraded to sub-investment or “junk” status. Standard and Poor’s Global Ratings (S&P) said the executive changes “have put at risk fiscal and growth outcomes” in a statement, adding that 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.”
President Jacob Zuma fired Finance Minister Pravin Gordhan in favour of Malusi Gibaba in the reshuffle. With Gordhan largely having been seen as the only thing standing between the country and a downgrade, the decision comes as no surprise to economists.
The Federation of Unions of South Africa (Fedusa) even issued a statement to the effect that the downgrade came as a result of “self-inflicted pain and bad leadership”. “We were going to London, New York and Boston to meet with ratings agencies and investors, then the president decided to cancel the trip, call back the minister of finance and announce in the night a cabinet reshuffle, and this is the consequences of bad leadership,” Dennis George, Fedusa’s General Secretary told reporters when the downgrade was announced.
One newspaper pointed out that it took just 90 hours after the President fired Gordhan for South Africa’s credit rating to be downgraded. This is the first time in 17 years.
“The rating action also reflects our view that contingent liabilities to the state, particularly in the energy sector, are on the rise, and that previous plans to improve the underlying financial position of Eskom may not be implemented in a comprehensive and timely manner,” S&P said. “Higher risks of budgetary slippage will also put upward pressure on South Africa’s cost of capital, further dampening already modest growth. The negative outlook reflects our view that political risks will remain elevated this year, and that policy shifts are likely, which could undermine fiscal and economic growth outcomes more than we currently project.”
The downgrade will affect all sectors of the economy. In the longer term, it will lead to higher interest rates and an increase in the risk premium. This means that lenders increase interest rates because of a perceived greater risk in default. Additional pressure will also be put on the Rand, causing a rise in the price of imported goods.
Image credit: https://www.flickr.com/photos/governmentza/12792269543