International credit rating firm Fitch dropped its outlook for South Africa from stable to negative on Friday, citing the country's recent political turmoil under President Jacob Zuma. Zuma has been engulfed by graft scandals and a power struggle with Finance Minister Pravin Gordhan, while economic growth has fallen to 0.5 percent and unemployment hit a 13-year high.
"Political risks to standards of governance and policy-making have increased," Fitch said in a statement, confirming that it kept South Africa's credit rating at one notch above "junk" status. Moody's was expected to issue its updated grading later Friday, before Standard & Poor's makes its key announcement on December 2. Like Fitch, S&P currently has South Africa - the continent's most developed economy - rated at the lowest investment grade.
The credit reviews could further drain investor confidence in the country's prospects under Zuma and the ANC party, which has ruled since the end of apartheid. "The in-fighting within the ANC and the government is likely to continue over the next year," Fitch said. "This will distract policymakers and lead to mixed messages that will continue to undermine the investment climate, thereby constraining GDP growth."
Efforts to avoid junk status have been at the centre of political drama for months, with Zuma loyalists at loggerheads with Gordhan, who is widely respected among international investors. "Zuma has focused on removing Gordhan and maintaining his grip on power, while Gordhan (has) been working very hard to avert a ratings downgrade," the Eurasia consultancy group said.
A junk rating by S&P could trigger bond selling by foreign investors, as well as raise borrowing costs. Some investment funds have rules that allow them to only hold bonds that have investment-grade ratings. "Efforts made by South Africa to keep the country on an investment grade have paid off," the treasury said after the Fitch announcement, while acknowledging Fitch's concerns over political uncertainty.
Pravin Gordhan had been due to appear in court earlier this month on graft charges that many analysts saw as an attempt by Zuma associates to oust him. The charges were dropped at the last minute, exposing deep tensions in the ANC as several ministers came out in his support.
Gordhan was appointed only last year to calm panicked investors when Zuma sacked two finance ministers within four days. Gordhan and deputy president Cyril Ramaphosa have been pushing for reform of loss-making state companies, including power company Eskom and national airline South African Airways. A recent watchdog report included allegations that Zuma ensured one business family won huge preferential contracts to supply Eskom with coal.
Zuma said on Friday he would launch a court challenge to the report and its order to set up a judicial inquiry. "Business confidence remains depressed and investment has continued to contract," Fitch added. "The economy had been hit in 2015 and 2016 by electricity shortages, the worst drought in decades, a sharp fall in international prices for some of South Africa's main mining commodities and rising policy uncertainty." The ANC is due to elect a new leader at the end of next year, ahead of the 2019 general election when Zuma must stand down after serving two years.
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