South Africa’s Economy in More Trouble, Credit Rating Cut To Junk

South Africa’s Economy in More Trouble, Credit Rating Cut To Junk

South Africa’s credit rating has been cut to junk status by the rating agency S&P Global. The agency said according to a BBC Report that political upheaval, including the sacking of finance minister Pravin Gordhan, was endangering the economy.

S&P also expressed concern over the nation’s debt situation and in particular the expense of backing state energy firm Eskom.

The rand fell 2% against the dollar on Monday following the announcement.
The sacking of Mr Gordhan, seen as a safe pair of hands and with a reputation for financial prudence, led to a 5% fall in the rand and prompted strong criticism. His replacement as finance minister by Malusi Gigaba was part of a cabinet reshuffle by President Jacob Zuma.

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The ruling African National Congress’ deputy president, Cyril Ramaphosa, called Mr Gordhan’s sacking “totally, totally unacceptable” and ANC secretary-general Gwede Mantashe also opposed it.

Implication of the Downgrade

The downgrade is likely to make it more expensive for South Africa to borrow money on the international markets, as lending to the country would be seen as riskier.
“Internal government and party divisions could, we believe, delay fiscal and structural reforms, and potentially erode the trust that had been established between business leaders and labour representatives (including in the critical mining sector),” S&P said.
“An additional risk is that businesses may now choose to withhold investment decisions that would otherwise have supported economic growth. We think that ongoing tensions and the potential for further event risk could weigh on investor confidence and exchange rates,” S&P added.

Effects of South Africa’s ministerial ‘massacre’

Call to reform SA economy ‘radically’ – the new Finance Minister, Mr Gigaba spoke at the weekend of plans to “radically transform” the country’s economy. While he has a track record of policymaking, most recently as home affairs minister, he lacks a background in economics. That prompted criticism that Mr Gigaba is too inexperienced for the job.

‘Superficial’ changes

In 2014, the ANC adopted “radical economic transformation” policies to boost the economic position of the black majority in the post-apartheid nation. But many in the ruling party believe the process has been “too slow and in many instances superficial”, said Mr Gigaba on Saturday.

“The ownership of wealth and assets remains concentrated in the hands of a small part of the population,” he said. But Mr Gigaba added that he did not “seek to implement a reckless lurch in a particular direction”.

“We will stay the course in terms of the fiscal policy stance approved by the government,” the new minister said. South Africa’s economy expanded by 0.3% in 2016, compared with 1.3% in the previous year. Moody’s is due to make its latest pronouncement on South Africa’s credit rating on Friday according to BBC. It has the country two notches above junk status.

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