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President of South Africa Jacob Zuma reacts during a rally following the launch of a social housing project in Pietermaritzburg, South Africa, April 1, 2017. (ROGAN WARD/REUTERS)
President of South Africa Jacob Zuma reacts during a rally following the launch of a social housing project in Pietermaritzburg, South Africa, April 1, 2017. (ROGAN WARD/REUTERS)

South Africa downgraded to junk status after Zuma cabinet purge, markets tumble Add to ...

After an emergency weekend meeting, S&P Global Ratings has downgraded South Africa’s credit rating to junk status for the first time in 17 years, warning of internal divisions in the government after President Jacob Zuma’s shocking late-night purge of his top finance officials.

The downgrade is the latest sign of the growing concern that Mr. Zuma will open the spigots of the national treasury to provide a flood of state contracts and big-spending projects for his close friends, the controversial Gupta brothers, who have a business partnership with his son.

Two other ratings agencies were expected to downgrade South Africa this week. Moody’s has also warned that it is reviewing South Africa for a possible downgrade, although it won't release the decision for 30 to 90 days.

The S&P downgrade will increase South Africa’s borrowing costs and heighten the pressure on its currency, the rand, which has lost 12 per cent of its value over the past week because of Mr. Zuma’s political moves. The country is already suffering from high unemployment and a stagnant economy, with growth of just 0.3 per cent last year.

South Africa’s rand, bonds and banking shares tumbled sharply on Tuesday after the downgrade.

The downgrade will also provide powerful ammunition to Mr. Zuma’s opponents within the ruling African National Congress as they try to force him from office.

S&P wasn’t scheduled to review South Africa’s credit rating until June, but it held an emergency meeting after Mr. Zuma fired his finance minister, Pravin Gordhan, as part of a sweeping purge of his cabinet opponents at midnight on Thursday night. It decided to cut South Africa’s foreign-currency rating to double-B-plus, the highest junk score, with a negative outlook.

The Gupta family had been using its television channel and political allies to wage a protracted campaign against Mr. Gordhan. Analysts say the Guptas blamed Mr. Gordhan for blocking their bid for a bigger slice of South African state contracts. They also accused him of conspiring with local banks to shut down their bank accounts. The banks and treasury officials, however, have pointed to suspicious transactions by Gupta-linked businesses.

After his sacking of his finance minister, Mr. Zuma has faced an internal revolt in his ruling party. Three of the top six ANC leaders – including deputy president Cyril Ramaphosa – have publicly criticized the cabinet purge.

In its explanation for the downgrade, S&P cited the cabinet purge and the “heightened political and institutional uncertainties” that it has triggered.

“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,” the agency said.

“This has increased the likelihood that economic growth and fiscal outcomes could suffer. … 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 labour representatives.”

South Africa’s new Finance Minister, Malusi Gigaba, had scrambled to try to reassure the credit agencies in a telephone conference call within hours of taking office on Friday. By Monday, he was telling the media that he didn’t expect a downgrade. “There’s so much going on in our country that changing a certain individual won’t cause a credit downgrade,” he said.

But his prediction was wrong, and he had clearly failed to placate the agencies.

Mr. Gigaba also argued that any credit downgrade wouldn’t be permanent and could be reversed. But South African analysts noted that it has taken an average of seven years for countries to recover their investment-grade rating after they are downgraded. Of the 20 countries downgraded to junk status by S&P in the past two decades, less than half have been able to regain their credit rating so far.

Business Leadership South Africa, a group representing the country’s biggest companies, said Mr. Zuma was “directly responsible” for the “catastrophic” downgrade in the country’s credit rating. It was his “ill-considered” cabinet purge that led directly to the downgrade, the business group said in a statement.

“The cost of the downgrade to all South Africans, the poor in particular, will be felt in higher interest rates, higher inflation, higher food prices and lower economic growth which will reduce investment and employment,” it said. “In addition, capital from international investors will be less available and more expensive.”

John Ashbourne, Africa economist at Capital Economics, said the downgrade was “dispiriting news for South Africa” but already largely anticipated by the markets. Downgrades by other agencies are “very likely,” he said in a statement.

“The downgrade will probably have a more significant political effect,” he said. “The loss of the rating will bolster opponents of President Zuma, who will use it as evidence that his recent reshuffle is harming the country.”

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