S. Africa's sovereign credit rating downgraded to junk status

Rating agency Standard & Poor's (S&P) on Monday downgraded South Africa's sovereign rating to junk status days after President Jacob Zuma sacked Finance Minister Pravin Gordhan.

S&P lowered the long-term foreign currency sovereign credit rating on South Africa to 'BB+' from 'BBB-'and the long-term local currency rating to 'BBB-' from 'BBB'.

S&P said in a statement that its decision was based on the cabinet reshuffle effected by Zuma last week.

The reshuffle, which affected 10 ministers and 10 deputy ministers, put South Africa's fiscal and growth outcomes at risk, the agency said.

"We assess that contingent liabilities to the state are rising," S&P said.

The agency also lowered the short-term foreign currency rating to 'B' from 'A-3' and the short-term local currency rating to 'A-3' from 'A-2'.

S&P said the outlook on all the country's long-term ratings is negative.

In addition, S&P lowered the long-term South Africa national scale rating to 'zaAA-' from 'zaAAA', and affirmed the short-term national scale rating at 'zaA-1'.

"The downgrade reflects our view that the divisions in the ANC-led government that have led to changes in the executive leadership, including the finance minister, have put policy continuity at risk.

"This has increased the likelihood that economic growth and fiscal outcomes could suffer. The rating action also reflects our view that contingent liabilities to the state, particularly in the energy sector, are on the rise, and that previous plans to improve the underlying financial position of Eskom may not be implemented in a comprehensive and timely manner," the agency said.

It warned that higher risks of budgetary slippage will also put upward pressure on South Africa's cost of capital, further dampening already-modest growth.

The news plunged the rand immediately to R13.71 against the dollar from R13.40 last Friday. Endit