South Africa avoids a second Fitch cut as rating affirmed

The local- and foreign-currency ratings were affirmed at BB+, Fitch said in an emailed statement Thursday. The outlook on both assessments was kept at stable.

Fitch and S&P Global Ratings cut their assessments of South Africa’s foreign-currency debt to the highest junk level in early April after a late-night cabinet reshuffle in which President Jacob Zuma replaced Pravin Gordhan as finance minister with Malusi Gigaba, a former home affairs minister. The rand lost as much as 11 percent against the dollar after the president called Gordhan back from meetings with investors in the U.K. and subsequently dismissed him.

The move sparked street demonstrations pushing for Zuma’s removal from office while opposition parties tabled a motion of no confidence against him in parliament. The country’s High Court last month ordered Zuma to explain his cabinet changes. The ruling African National Congress’s national executive committee debated and rejected the option of removing Zuma at a meeting that ended May 28.

The cabinet changes are “likely to undermine governance of state-owned enterprises, weaken fiscal consolidation and reduce private-sector investment as a result of weaker business confidence,” Fitch said.

The rand strengthened 0.8 percent to 13.0100 per dollar by 4:11 p.m. in Johannesburg on Thursday. Yields on rand-denominated government bonds due December 2026 fell 4 basis points to 8.55 percent.

Fiscal Pledge

Gigaba has committed to fiscal discipline in an attempt to meet the budget-deficit target of 3.1 percent of GDP in the year through March. Fitch estimates a gap of 3.3 percent, saying budget cuts it anticipates the National Treasury will make later this year won’t be sufficient to offset a tax shortfall.

“Fiscal consolidation remains firmly on track,” the National Treasury said in an emailed statement after Fitch’s decision. Gigaba “is currently re-engaging with the private sector to make sure that the joint work of government, business, labor and the civil society continues and that the pledges made thus far are fulfilled.”

South Africa has 477.7 billion rand ($36.7 billion) of guarantees available for public institutions, 308.3 billion rand of which has been used, according to the February budget. State-owned power utility Eskom Holdings SOC Ltd. is the biggest recipient, using 218.2 billion rand of the 350 billion rand available to it.

“Sizeable contingent liabilities and deteriorating governance” at state-owned companies weigh down the rating, Fitch said.

On Tuesday, Public Enterprises Minister Lynne Brown ordered that Brian Molefe be removed as the electricity producer’s chief executive officer after a committee of cabinet ministers found his reinstatement was incorrect.

Molefe had quit in November after a graft ombudsman indicated he’s made decisions favoring members of the Gupta family who are friends with President Zuma.

Brown said earlier this month she had agreed with a board decision to rehire Molefe after rejecting a pension payout of 30 million rand to the former CEO, because the utility would get better value from him returning to work.

Moody’s, S&P

While Moody’s Investors Service still rates South Africa’s foreign-currency debt at two levels above junk, the company put its assessment on review for a downgrade in April and hasn’t published the outcome yet. S&P is scheduled to make an announcement about its rating on Friday.

The Treasury is hoping for a positive outlook from both Moody’s and S&P, said Mampho Modise, the department’s chief director for strategy and risk management.

“We have shown signs of progress in reform implementation,” she said by phone.

Africa’s most-industrialized economy expanded by 0.3 percent in 2016, the slowest pace since a 2009 recession. Gross domestic product will probably grow 1 percent this year and 1.8 percent in 2018 as political uncertainty will continue to weigh on private investment, Fitch said. A deterioration in growth could result in a negative rating action, the company said.

South Africa had enjoyed investment-grade standing at all three major ratings companies since at least 2000.

Courtesy Bloomberg