April 3, 2017
S&P Tosses South Africa Onto The Fiscal Scrapheap With New Junk Status

Ratings agency Standard and Poor's (S&P Global) has officially downgraded South Africa's credit rating to junk status. The move comes in the wake of President Jacob Zuma's recent cabinet reshuffle.

S&P Global said that the move to junk status -- sub-investment grade -- was implemented "to reflect its view that the divisions in the ANC-led government have led to changes in the executive leadership."

The South African rand has been declining dramatically since President Zuma announced last week that Pravin Gordhan and his deputy, Mcebisi Jonas, would be replaced.

President Jacob Zuma at an ANC rally.
South African President Jacob Zuma sings after being reelected as the head of the nation's dominant political party. [Image by Jerome Delay/AP Images]

S&P Global reflected on South Africa's economic future in their report to justify the downgrade to junk status.

The report states, "The negative outlook [junk status] reflects our view that political risks will remain elevated this year, and that policy shifts are likely which could undermine fiscal and growth outcomes more than we currently project."

Some people may think that being relegated to the fiscal scrap heap is a terminus for economic decline, however, junk status is not as low as a country's credit rating could go. The document went on to state that if South Africa's macroeconomic performance continues to deteriorate, a further downgrade will surely be in store in the future.

Or course, the opposite is also true. If the country performs better fiscally, S&P Global may consider upgrading South Africa from junk status to "stable." However, at this stage, considering the current political climate, it seems a bit unlikely.

Pravin Gordhan is a highly-respected political figure, often lauded for his fearlessness, integrity, and fiscal prowess, and under his recent tenure, he managed to deflect potential rating downgrades to junk status, curb exorbitant amounts of wasteful expenditure, and implement various appropriate austerity measures to keep South Africa's floundering economy afloat.

Investors and markets alike welcomed Pravin Gordhan's appointment to a second term as Minister of Finance after he was asked to replace Nhlanhla Nene in December of 2015. Gordhan was momentarily superseded by an obscure former mayor, David van Rooyen, in a move that ultimately crushed the South African rand and caused the Public Investment Corporation (PIC) to lose more than R100 billion in desperately needed public pension funds.

The new Finance Minister, Malusi Gigaba, attempted to allay investors' fears by announcing in a press briefing that he would be implementing radical changes within the Treasury. Among the changes is a move to set aside R500 billion for direct investment in black-owned businesses, thus hoping to economically empower the masses.

South Africa's new Finance Minister Malusi Gigaba.
Malusi Gigaba, the newly appointed finance minister, looking confident at the presidential guest house in Pretoria. [Image by Themba Hadebe/AP Images]

According to the Times Live South Africa's economic growth has decreased from 1.3 percent in 2015 to a mere 0.3 percent in 2016. Gigaba believes that radical economic transformation is the answer.

"As government, our focus is now very much on the radical transformation of our economy so that all who live in South Africa can benefit from the economy. Tough and unpopular choices will have to be made to ensure such a vision."

Former Finance Minister Pravin Gordhan has challenged South Africans to mobilize against the government's careless actions.

"There are many of my comrades in the [ANC] NEC that would say the same thing, that the people shall govern. You can't govern if you remain in your comfortable lounge. Become organised, part of something," he told the gathering. You must hold us accountable, hold meetings like this frequently. That's accountability. Parliament is not the only instrument in a democratic society, it takes place everywhere in the country."

The rand continues to decline rapidly. At the time of writing (18:15 p.m. CAT), the currency was trading at R13.66 to the dollar and a significant drop from R12.46 at the close on Friday, March 31.

Ratings agency Fitch has South Africa at one notch above junk, while Moody's -- to announce it's review findings on Friday, April 7 -- has got the country at two notches above junk.

This is a breaking story. More to developments to follow.

[Featured Image by Denis Farrell/AP Images]