Zuma dices with junk status for South Africa to bolster political hold

Ratings agency Fitch is likely to follow rival Standard & Poor's and cut South Africa's sovereign credit rating to below investment-grade, analysts said, an outcome that would underscore worries about political uncertainty and prompt a further sell-off in assets.

The ratings agency was considering its position as thousands of South Africans took to the streets on Friday to urge President Jacob Zuma to step down after a turbulent week in the wake of his firing of respected finance minister Pravin Gordhan. The marches were organised by political and civil society groups who say the president will hurt the economy and cost yet more jobs by staying in office.

“The marches in themselves will not have an effect on the ANC; the only thing that will have an effect will be the internal ebb and flow of its factions,” said political analyst Daniel Silke.

S&P Global Ratings cut South Africa’s foreign currency debt to speculative grade or “junk” status in an unscheduled review on Monday, citing political tensions that led to the sacking of Gordhan.

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The firing deepened divisions in the party and caused a backlash among voters

Zuma abruptly dismissed Gordhan last Friday, in an apparent show of force meant to consolidate his faction’s power before the ANC’s national conference in December, when a new party leader – and most likely the country’s next president – will be chosen. The firing instead deepened divisions in the party and caused a backlash among voters.

Top party leaders condemned the sacking, which was part of a broader cabinet reshuffle, saying that Zuma had not consulted them. The deputy president, Cyril Ramaphosa, called the decision "unacceptable". But on Wednesday, the ANC said it accepted Zuma's reason for firing Gordhan, which ANC secretary-general, Gwede Mantashe, said was "the irretrievable breakdown of the relationship between the president and a member of his cabinet".

Zuma and Gordhan, members of two rival ANC factions, have been engaged in a long dispute about control of party and state coffers. Gordhan was seen as a bulwark against the misuse of public funds and was respected for his oversight of state enterprises.

Three others removed

Three other cabinet ministers removed by Zuma alongside Gordhan in a reshuffle last week quit as lawmakers of his African National Congress on Thursday ahead of a vote of no-confidence in the president on April 18th that the ANC has said it will defeat.

Mcebisi Jonas, an outspoken critic of government corruption who was deputy finance minister until Zuma sacked him, resigned as a member of parliament along with Tina Joemat-Pettersson and Dipuo Peters, axed as energy and transport ministers last week.

They will be replaced with candidates from an ANC list.

The ANC has rejected calls from opponents and some long-time political allies for Zuma to resign after the reshuffle.

Jonas made headlines last year when he said he had been offered the finance minister’s job by members of the Gupta family, Indian businessmen who have close ties with Zuma and have been accused of influence-peddling. Zuma and the Gupta family have denied any wrongdoing.

Zuma (74) has survived four previous no-confidence votes. The ANC has a commanding majority in the national assembly and said on Thursday that its members would vote against the motion. The ANC chief whip’s office rejected calls for a secret ballot for the no-confidence motion.

The ongoing uncertainty is doing little to underpin South Africa’s standing in international financial circles.

"Fitch is likely to be the next agency to downgrade in the next seven to 10 days, to align with S&P at BB+, which means that two out of the three major ratings agencies will have South Africa's foreign currency rating at 'junk'," BNP Paribas Securities South Africa economist Jeffrey Schultz said on Thursday.

Double trouble

Downgrades to junk from at least two agencies would see South Africa drop out of some widely used global bond indexes and force international funds that track them or that are prohibited from holding sub-investment grade securities to sell.

Fitch, which rates South Africa BBB-, its lowest investment-grade rating, has said Zuma’s cabinet shake-up heightened political risks and signalled policy change, putting its rating at risk. The agency has not said when it will publish its review, but analysts say it could be soon.

Africa's most industrialised economy depends on foreign money to cover its large budget and current account deficits but is struggling to attract investment

“Fitch tends to be aligned with S&P, and so could also provide a sub-investment country credit rating for South Africa this year,” Investec chief economist Annabel Bishop said in a note.

Africa’s most industrialised economy depends on foreign money to cover its large budget and current account deficits but is struggling to attract investment, with sentiment dimmed by political uncertainty and a weak growth outlook.

The rand currency has fallen more than 12 per cent since March 27th, when Zuma ordered Gordhan to return from an investor roadshow abroad. Government bonds have also weakened.

Conservative investment funds usually require countries to have at least two investment-grade ratings for them to invest. For now, Fitch and Moody’s – whose Baa2 rating is two notches above “junk” – ensure South Africa meets that criteria.

Moody’s has said it is reviewing the rating, a process that could take 30-90 days.

Schultz at BNP Paribas expects Moody’s to downgrade South Africa to Baa3 from Baa2, putting it one notch above junk.

KPMG senior economist Christie Viljoen also said Fitch was likely to downgrade South Africa by early June at the latest.

“I initially thought December. But now June is looking realistic as well,” Viljoen said, concurring that Moody’s was unlikely to make a two-notch downgrade to junk.

$10bn at stake

If South Africa loses two of its prized investment grade ratings for foreign and local currency debt, the country could lose more than $10 billion in investment funds.

All three agencies still rate South Africa investment-grade for local currency borrowing, which makes up about 90 per cent of the country’s total 2.2 trillion rand (€150 billion) of debt.

A downgrade to junk by Moody’s was not ruled out completely, with Standard Chartered Bank’s chief Africa economist Razia Khan saying on Monday the recent political tensions raised the risk of a potential two-notch move from the agency.

In another blow to Zuma, the treasury said its director general, Lungisa Fuzile, who is well-respected in financial markets and worked closely with Gordhan and Jonas, would leave after new finance minister Malusi Gigaba takes the reins.

Gigaba has declared plans to redistribute wealth in the economy to poor black people as part of a programme of “radical socio-economic transformation“ promised by Zuma. Inequality still festers in South Africa more than 20 years after the end of white-minority rule.

Fears that budget discipline could falter under Gigaba have contributed to market jitters, but he and Zuma have assured investors they will maintain policies established under Gordhan.

Zuma has pledged to expropriate land but analysts said violent seizures of farms, as happened in neighbouring Zimbabwe, were unlikely.

"We didn't need the downgrade, by the way, if we had just behaved ourselves," Gordhan said on Thursday at a memorial in Cape Town for veteran anti-apartheid stalwart Ahmed Kathrada. – Reuters