S&P Cuts South Africa’s Credit Rating to Junk

S&P Global has cut South Africa’s credit rating to junk status.

The ratings agency said that South Africa’s political upheaval, including the recent sacking of finance minister Pravin Gordhan, was endangering the economy.

S&P also expressed concern over government debt, and in particular the expense of supporting the state energy firm Eskom.

The news put more pressure on the rand, which was down 2% against the US dollar.

Pravin Gordhan’s sacking, seen as a safe pair of hands and with a reputation for financial prudence, led to a 4% fall in the rand on March 31 and prompted strong criticism.

His replacement as finance minister by Malusi Gigaba was part of a cabinet reshuffle by President Jacob Zuma.

However South Africa’s deputy president, Cyril Ramaphosa, called Pravin Gordhan’s sacking “totally, totally unacceptable” and the Gwede Mantashe, secretary-general of the ruling African National Congress (ANC), also opposed it.

The financial downgrading is likely to make it more expensive for South Africa to borrow money on the international markets, as lending to the country would be seen as riskier.

S&P explained its decision, stating that: “Internal government and party divisions could, we believe, delay fiscal and structural reforms, and potentially erode the trust that had been established between business leaders and labor representatives (including in the critical mining sector).”

“An additional risk is that businesses may now choose to withhold investment decisions that would otherwise have supported economic growth,” it added.

S&P also raised concern about the level of borrowing by state energy company Eskom.

The government guarantees 350 billion rand ($25 billion) of its debt, which is equivalent to about 7% of the nation’s economic output.

For his part, Malusi Gigaba spoke at the weekend of plans to “radically transform” South Africa’s economy.

While he has a track record of policymaking, most recently as home affairs minister, he lacks a background in economics.

That prompted criticism that Malusi Gigaba was too inexperienced for the job.