Weekend Argus (Saturday Edition)
Another credit downgrade setback
Cabinet reshuffle still having knock-on effect
FITCH, the international ratings agency, has downgraded South Africa’s credit rating to junk status, just as business came to terms with Standard & Poor’s downgrade of the country only days before.
Fitch pointed to President Jacob Zuma’s decision to remove Pravin Gordhan as finance minister last week, saying it was likely to mean a change in economic policy.
“In Fitch’s view, the cabinet reshuffle, which involved the replacement of the finance minister, Pravin Gordhan, and the deputy finance minister, Mcebisi Jonas, is likely to result in a change in the direction of economic policy,” the ratings agency stated.
It suggested that Gordhan may have been punished for efforts to improve the running of parastatals and said with him gone, these were now more likely to be a significant burden on the ’s balance sheet.
“The reshuffle partly reflected efforts by the outgoing finance minister to improve the governance of state-owned enterprises ( SOEs),” Fitch said.
“(It) 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.”
Fitch’s decision follows four days after S&P downgraded South Africa’s credit rating to junk, and was widely expected.
Nedbank and Barclays Africa said on Thursday the knock-on effect on their own ratings had been expected, since any changes to sovereign ratings were automatically reflected in banks’ ratings.
Both banks told investors that their balance sheets were sufficiently capitalised to deal with the downgrades.
Yesterday it was the turn of Eskom and Transnet to issue statements attempting to reassure the markets.
Ironically, Eskom expressed confidence that it would weather the S&P downgrade with the support of government guarantees, a subject the ratings agencies list high among their concerns.
In its response yesterday, Anoj Singh, Eskom’s chief financial officer, said it was confident it would execute its funding plan over the next five years “backed by the availability of the government guarantees”.
Fitch’s statement released a little later yesterday also referred to “differences over the country’s expensive nuclear programme”, which it noted had preceded the dismissal of the country’s previous finance minister, Nhlanhla Nene, in December 2015.
Fitch said it was of the view that the nuclear issue “may have also contributed to the decision for the recent reshuffle”, adding that “under the new cabinet, including a new energy minister, the programme is likely to move relatively quickly”. The agency added that the Treasury, under its previous leadership, had said that Eskom could not absorb the nuclear programme with its current approved guarantees, so it will probably have to substantially increase guarantees to Eskom.
The downgrade by Fitch came as thousands of South Africans marched through major cities in protest against Zuma.
Fitch said better governance would be one of the factors that could prompt ratings agencies to rethink their position on South Africa.
The Treasury acknow- ledged that the downgrade was a setback, but said the government remained committed to the fiscal policy outlined in the February Budget and to improving the running of state-owned enterprises.
“The announcement by Fitch is noted by government and while it is a setback, government remains committed to making sure that its work with business, labour and the civil society continues in order to improve the business confidence and implement structural reforms to accelerate economic growth,” it stated.
“We urge all South Africans to remain positive and continue to work hard in turning this economy around.” – ANA