Ratings agency Fitch has followed rival S&P and downgraded South Africa's sovereign credit rating to junk status.
Fitch downgraded South Africa from 'BB+' from 'BBB-', cutting both the foreign currency and local currency ratings by one notch on Friday afternoon but keeping the outlook stable.
Like S&P Global Ratings, which cut South Africa's foreign currency debt to 'junk' status in an unscheduled review on Monday, Fitch cited the political tensions and the sacking of finance minister Pravin Gordhan as one of the reasons for the downgrade.
"The downgrade of South Africa's Long-Term IDRs reflects Fitch's view that recent political events, including a major cabinet reshuffle, will weaken standards of governance and public finances," the ratings agency said in a statement.
It added that it believes that following the government reshuffle, fiscal consolidation will be less of a priority given the president's focus on "radical socioeconomic transformation".
The downgrade makes Fitch the first of the agencies to cut the rating on SA’s rand denominated debt to junk status, raising the prospect of a bond sell-off by investors whose mandates restrict them to hold only investment grade assets.
S&P’s rating on SA’s local currency rand denominated bonds is one notch above its foreign currency rating so the local currency rating is still investment grade on the S&P scale, and on that of Moody’s. However, Moody’s on Monday night put SA’s local and foreign currency ratings on review for a downgrade, and is expected to announce its decision within 30 to 90 days.
About 90% of government’s borrowing is in rand, so it is less vulnerable to a foreign currency downgrade, but foreign investors hold about 35% of the government’s rand-denominated bonds, so the Fitch downgrade could also cause some outflows of capital as foreign investors sell.
This is a developing story.
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