World Economy

S&P Downgrades South Africa’s Debt to ‘Junk’

S&P Downgrades South Africa’s Debt to ‘Junk’S&P Downgrades South Africa’s Debt to ‘Junk’

South Africa’s demise toward full “junk” status looks almost inevitable after Standard & Poor’s cut the country’s credit rating as the first of three major agencies following the sudden dismissal of the finance minister.

S&P Global Ratings on Monday downgraded South Africa’s sovereign credit rating to BB+ from BBB- grade, saying the recent firing of its internationally respected finance minister Pravin Gordhan posed a risk to the country’s fiscal policy, DW reported.

The country’s currency, the rand, dropped by as much 2% to the US dollar in response to the news, while government bonds also weakened sharply.

“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 in a statement.

President Jacob Zuma’s move to fire Gordhan, and eight other cabinet members, threw markets into turmoil already on Friday, resulting in the worst weekly depreciation of the rand since 2015.

The timing of the move seems curious, coming one week before agency Moody’s is set to pass its verdict on Friday, and likely dealing another blow to South Africa. A downgrade of at least one notch is now certain.

Moody’s so far considers South African debt two notches above non-investment grade or “junk”, while Fitch—the third big ratings agency—rates the country just one notch above that status.

Should any of them follow suit and strip South Africa of its investment grade rating, that could potentially have a greater market impact because many pension funds and other large investors are required to sell bonds once two separate agencies rate them as “speculative grade”.

The bottom line is that then it will cost South Africa more to borrow money in global markets to finance its widening budget deficit. Furthermore, South African consumers are highly indebted and continue to finance their lifestyles through debt so the cost of servicing this debt will become more expensive.

Former finance minister Pravin Gordhan was largely considered a steady hand in an otherwise volatile government and had been mandated to maintain the country’s credit rating.

His successor, home affairs head Malusi Gigaba, has little notable finance experience. Gigaba said earlier on Monday he had spoken to the ratings agencies, and informed them he would maintain Pretoria’s fiscal stance.



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