South Africa’s sovereign credit rating has been cut to junk

For months, South Africans have fretted about the possibility of a credit-ratings downgrade, concerned it would affirm that president Jacob Zuma’s leadership and infighting in the ruling African National Congress were dragging the country in the wrong direction.

On April 3, Standard and Poor’s confirmed their worst suspicions.

Following Zuma’s decision to fire finance minister Pravin Gordhan, S&P stripped South Africa of its BBB- investment-grade credit rating and assigned it a “junk” rating of BB+. The ratings firm also changed its outlook on South Africa to negative, given the political tumult in the country.

On news of the downgrade, the rand immediately slumped 3% against the dollar and #junkstatus started trending on local social media (it didn’t help that there was a tremor in Johannesburg around the same time either).

The review was directly attributed to Zuma’s decision to fire Gordhan and deputy finance minister Mcebisi Jonas in a midnight reshuffle on March 31. The initial fallout was immediate: the rand plummeted, senior party leaders accused Zuma of acting unilaterally, and people began to protest. Next came the response from S&P, which was scheduled to review South Africa’s economy in June, but found the recent developments too risky to ignore.

“In our opinion, the executive changes initiated by president Zuma have put at risk fiscal and growth outcomes,” the ratings firm said in a statement. “The negative outlook reflects our view that political risks will remain elevated this year.”

Another major ratings firm, Moody’s, is expected to publicize is updated review of South Africa later this week.

On the same day as the S&P announcement, new finance minister Malusi Gigaba sounded convinced South Africa would not be downgraded. “There’s so much going on in our country that changing a certain individual won’t cause a credit downgrade,” he said wrongly in his first press conference at national treasury.

He also tried to assure South Africans that he would steer the economy on a steady growth path, a tough task considering the economy grew by just 0.3% last year.

In a year-long political feud between the presidency and treasury, Gordhan has faced possible arrest, fraud charges and political isolation. Each time, the rand has suffered, driving national anxiety. It probably didn’t help that Gordhan was pulled out of planned meetings with ratings firms before his axing. After he was finally fired, the former finance minister was hailed as a national hero against corruption.

The political uncertainty has real economic consequences. South Africans are already in debt, nationally and individually: public debt was 50,1% last year and 20% of consumers were three months in arrears (pdf). South Africans—and the markets—were already wary of Gigaba taking the reigns.

The ratings downgrade will make borrowing more difficult for the South African government and international markets will take their money to more attractive economies, according to economists.

For ordinary South Africans, the downgrade will likely drive up interest rates. It could force the government to increase value added tax, which would hit the poor, or raise taxes on the already over-taxed middle class.

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