Second ratings agency prepares to downgrade SA

Moody’s on Monday put South Africa on watch for a possible ratings downgrade‚ dealing a double blow to the country’s image as an investment destination in one day.

A country’s credit rating is a signal to investors of how capable the state is of repaying debt. The lower the rating‚ the harder it is for the government to borrow money to spend on key projects.

As a result, domestic interest rates could also rise‚ making it harder for ordinary South Africans to afford bonds‚ credit cards‚ furniture and other forms of debt.

Moody’s cited last week’s Cabinet reshuffle by President Jacob Zuma‚ which has sparked widespread political and popular outrage‚ as the reason for the review.

Zuma last Thursday announced dramatic changes to his Cabinet‚ including the removal of respected finance minister Pravin Gordhan and his deputy Mcebisi Jonas. The two were seen as a key defence against irregular government spending and had frequently clashed with Zuma.

“On 30 March‚ the President of South Africa announced wide-ranging changes to the country’s government‚ changing top leadership in 10 ministries‚ including in key portfolios such as finance and energy‚” Moody’s said in a statement.

“Changes within a government do not generally signal material changes in a country’s credit profile. Here‚ however‚ the timing and scope of the reshuffle raises questions over the signal they send regarding the prospects for ongoing reforms‚ the underlying strength of South Africa’s institutional framework‚ and the fragile recovery in the country’s economic and fiscal position.”

The decision by Moody’s came just hours after fellow ratings agency Standard & Poor’s said it had relegated South African credit to junk status.

Zuma replaced Gordhan with Malusi Gigaba‚ who is regarded as a close ally of the president and had until last week been in charge of the home affairs department.

Gordhan’s departure could trigger a two-notch downgrade on South Africa’s local currency credit rating‚ which would lead to as much as $10 billion going out of the country‚ Reuters reported a day after Zuma’s Cabinet decision.

The reshuffle has renewed calls for Zuma to step down after a series of scandals‚ including a Constitutional Court ruling last year that he had violated his oath of office over the Nkandla saga.

Opposition parties have called for a vote of no confidence in the president to be carried out in parliament.

Gigaba has moved quickly to allay fears of a drastic change in fiscal policy‚ including communicating with ratings agencies. But it appears to have done little to address the concerns.

-Source: Tiso Black Star Group

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