Junk status inevitable
SA growth to fall further
SOUTH Africa’s credit rating is set to be cut to junk status this year, according to a Reuters poll taken just days after police summoned Finance Minister Pravin Gordhan over an investigation into a suspected rogue unit of the tax service.
A Hawks probe into a surveillance department at the South African Revenue Service once headed by Gordhan is fuelling speculation that Gordhan does not have President Jacob Zuma’s political support.
Zuma said on Thursday he had full confidence in the minister, but could not stop the investigations.
Nineteen of 23 economists surveyed by Reuters said that the investigation posed a “significant” risk of leading to a downgrade of South Africa’s sovereign rating to speculative non-investment grade at Standard & Poor’s December review.
The other four said it would be “marginally” significant.
The respondents overwhelmingly expected at least one agency to cut the rating to junk this year, with S & P seen as the most likely.
“The probe raises doubt about whether Mr Gordhan has the political space to implement much-needed fiscal reforms,” said Rafiq Raji, managing director at Macroafricaintel Investment in Lagos.
The development also comes ahead of the October budget and after a successful international roadshow in March, where Gordhan was accompanied by heads of business, government and labour unions singing from the same hymn sheet to tackle high unemployment and poor growth.
A Reuters poll shows that South Africa’s economic growth is already expected to slow to just 0.2% this year from 1.3% last year and only recover slightly to 1.1% next year, which will put extreme pressure on the government’s finances.
Both S & P and Fitch left ratings at BBB- in June, one notch above junk, but both agencies warned about the weakness of growth and heightened political risks.
Analysts have speculated that there was a plot to remove Gordhan from his position by allies close to Zuma.
Colen Garrow, economist of Lefika Securities, said elements which impact a credit rating are not only economic.
“In particular, the interference by the head of state on the operations of a vital organ of government has the potential to not only downgrade the sovereign credit, but to also prompt a [disinvestment] of capital from the country,” said Garrow.
If an actual cut to junk happens, the median response from 16 economists suggested the rand would lose about 7.5% in the aftermath against the dollar. — Reuters