Zuma's Power Play in Cabinet Brings S&P Downgrade to Junk

  • South Africa cut to junk by S&P for first time since 2000
  • President Zuma faces chorus of criticism for firing Gordhan

South African President Jacob Zuma’s shock decision to fire his finance minister and stack his cabinet with loyalists led to an immediate downgrade of the nation’s credit rating by S&P Global Ratings to junk and spurred calls for him to resign.

The decision by S&P to remove South Africa’s investment-grade rating for the first time in 17 years may be followed by downgrades by Moody’s Investors Service and Fitch Ratings Ltd. It comes amid a chorus of criticism within Zuma’s African National Congress over his decision to fire Pravin Gordhan.

Ravi Bhatia, credit analyst at S&P Global, speaks to Bloomberg TV

Source: Bloomberg

“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,” Banking Association of South Africa Managing Director Cas Coovadia said in emailed statement. “President Zuma has done South Africa great harm, and should be held to account by all South Africans.”

Zuma’s move to bolster his cabinet with supporters as he seeks to secure his choice as successor as leader of the ANC in December set off South Africa’s worst political crisis in almost a decade. While Zuma is assailed by critics inside and outside the party, even his political foes concede it’s still going to be difficult to dislodge him because it would require substantial defections among the ANC’s 62 percent majority in parliament.

The president has drawn rare public criticism by top party officials, including his deputy Cyril Ramaphosa, and former President Kgalema Motlanthe on Monday called on Zuma to step down. A wider group of ANC leaders will meet Tuesday to discuss the reshuffle, while opposition parties are pushing for a vote of no-confidence in parliament.

The Congress of South African Trade Unions, the nation’s biggest labor federation and an ally of the ANC, Tuesday called on Zuma to step down. Cosatu “no longer believes that the president is the right person to unite and lead the movement, the alliance and the country,” it said in a statement.

Rand Weakens

The rand, which was the world’s best performer this year through March 24, has dropped 9 percent against the dollar since Gordhan was recalled from a roadshow to London ahead of his removal. It’s erased all its 2017 gains for the biggest decline among more than 140 currencies monitored by Bloomberg since March 27. The yield on the benchmark government rand bonds due December 2026 declined seven basis points to 8.95 percent on Tuesday, after earlier hitting a four-month high.

Malusi Gigaba, who replaced Gordhan, is a former home affairs minister with no experience in finance.

“I don’t ask questions, I simply comply with the instructions given to me,” he told reporters in Pretoria, the capital, before the unscheduled S&P announcement on Monday. “There’s so much going on in our country that changing a certain individual won’t cause a credit downgrade.”

Hours later S&P did exactly that and Moody’s Investors Service, which rates South Africa’s debt at two levels above junk and with a negative outlook, put the nation on review for a downgrade. The timing and scope of the reshuffle raises questions over the signal they send regarding the prospects for ongoing reforms, Moody’s said Monday.

Ratings Risk

“It is far easier to be downgraded to junk status than it is to be upgraded to investment grade,” Nedbank Ltd. analyst Reezwana Sumad said in an emailed note to clients. “It may take on average five years to be upgraded back into investment grade. Also, Fitch tends to follow any S&P rating change.”

South Africa, the continent’s most-industrialized country, has enjoyed investment-grade standing at Moody’s since 1994, when the ANC came to power under Nelson Mandela. The other two ratings companies upgraded it above junk in 2000.

Zuma’s decision first to recall Gordhan on March 27 from a series of meetings with investors in the U.K. and the U.S. and then to fire him early Friday came after the two feuded for months over over the affordability of building nuclear power plants and the management of state-owned companies.

Gordhan ‘Divisive’

Zuma told his party’s leaders that Gordhan was divisive in the cabinet and blocked other ministers’ projects, according to a person with knowledge of their meeting.

The head of the National Treasury, Lungisa Fuzile, who was ordered to return home with Gordhan, has asked to leave his post at the end of this month, a year before his contract runs out, according to three people with knowledge of the matter, who asked not to be identified because no announcement has been made yet.

“It’s not my focus right now,” Fuzile said Tuesday after a briefing in Pretoria. “My objective is that the handover to the new minister is as smooth as possible and I’ll do everything to make sure that happens.”

Slow Growth

For an economy growing at the slowest pace since the 2009 recession and grappling with 27 percent unemployment, S&P’s action was a blow.

“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,” S&P said. “This has increased the likelihood that economic growth and fiscal outcomes could suffer.”

Motlanthe, in an interview Monday at Bloomberg’s office in Johannesburg, said Zuma doesn’t understand how his actions can influence decisions by rating companies.

“He doesn’t come across as someone who thinks about what is in the national interests or what is in the organizational interests, but seems to be driven by an agenda based on vested interests,” Motlanthe said. “That’s why to an observer there’s a measure of irrationality to what he does.”

— With assistance by Andre Janse Van Vuuren, Robert Brand, Arabile Gumede, George Lei, and Sam Mkokeli

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