Fitch downgrades South Africa to junk status

The international rating agency Fitch today downgraded South Africa long-term foreign and local-currency Issuer Default Ratings (IDRs) from BBB- to BB+ (Non-investment grade speculative or junk rating).

Fitch remained the country's outlook stable. The issue ratings on South Africa's senior unsecured foreign- and local-currency bonds were also downgraded to BB+ from BBB-.

The rating agency said the replacement of the Finance Minister Pravin Gordhan and his deputy, Mcebisi Jonas, is likely to result in a change in the direction of South Africa's economic policy.

"The downgrade of South Africa's long-term IDRs reflects Fitch's view that recent political events, including a major cabinet reshuffle, will weaken standards of governance and public finances," Fitch said in a statement.

"The reshuffle partly reflected efforts by the out-going finance minister to improve the governance of state-owned enterprises (SOEs). The reshuffle is likely to undermine, if not reverse, progress in SOE governance, raising the risk that SOE debt could migrate onto the government's balance sheet," the statement read.

Fitch said with the new finance and energy minister, the country's expensive nuclear program is likely to be accelerated. They believe this would increase contingent liabilities, which are already sizable.

The government's guarantee exposure to public institutions, according to the 2017/18 budget was R308.3 billion (22.34 billion U.S. dollars) at the end March 2017, up from R255.8 billion a year earlier. The State enterprises have additional liabilities of R463 billion in 2016 with no explicit guarantee. The government has on many occasions bailed loss making SOEs particular the power Eskom.

"Fitch believes that following the government reshuffle, fiscal consolidation will be less of a priority given the president's focus on 'radical socioeconomic transformation'. This means that renewed shortfalls in revenues, for example as a result of lower than expected GDP growth, are less likely to be compensated by expenditure and revenue measures." said Fitch.

"This could put upward pressure on general government debt, which at an estimated 53 percent of GDP at end-March 2017 was already slightly above the BB category median of 51 percent," Fitch added.

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