Fitch dumps SA in the trash

Johannesburg - Fitch Ratings on Friday became the second global ratings agency to cut the country’s credit status to sub-investment grade, sending South African dollar bond yields to a year high and causing the rand to weaken.

Fitch’s move marked the first time that the agency had downgraded the country to junk status since June 27 2000.

On Monday, S&P Global was the first agency to cut South Africa’s credit rating to junk status.

Moody’s Investors Service has put the country’s rating on review for a downgrade.

Friday’s announcement caused the rand to weaken by 12c to the dollar, to reach an intraday weakest point of R13.84, before being quoted at R13.78 at 6.36pm.

Yields on South African dollar bonds jumped to the highest this year, Bloomberg reported.

Fitch analysts Jan Friederich, Jermaine Leonard and Stephen Schwartz, all based in Hong Kong, said they did not believe Finance Minister Malusi Gigaba’s assurances that he would not change any policy that was in place at the National Treasury.

The Fitch analysts held a telephonic conference call with Gigaba hours after he became finance minister on March 31, following the axing of Pravin Gordhan by President Jacob Zuma as part of a Cabinet reshuffle.

“The new finance minister has stated that he does not intend to change fiscal policy and remains committed to expenditure ceilings that have been a pillar of fiscal consolidation,” Fitch analysts said in a report on Friday.

“However, Fitch believes that, following the government reshuffle, fiscal consolidation will be less of a priority, given the president’s focus on ‘radical socioeconomic transformation’.”

In his State of the Nation Address in February, Zuma said: “Radical socioeconomic transformation is not just political rhetoric ... Radical economic transformation, of which affirmative action and black economic empowerment form a part, are part of healing the divisions of the past.”

Cas Coovadia, managing director of the Banking Association of SA, said the major local banks held a two-hour meeting on Thursday with Gigaba during which he had committed to use the term “inclusive growth” rather than “radical socioeconomic transformation”.

Coovadia added that the local banks had always promoted inclusive growth.

Mayihlome Tshwete, Gigaba’s spokesperson, said clarity was needed on inclusive growth.

“It needs to be understood. We need to convince investors that there is not going to be a dangerous policy shift or anything reckless.”

He described radical economic transformation as an ANC policy that would address the economic order by giving black people upward mobility and giving more people jobs.

Tshwete said the banks understood the need for inclusive growth and that radical economic transformation would be achieved through state procurement and state expenditure, which would open up opportunities for black businesses and funding for small, medium and micro enterprises.

In the late 1990s, the talk was just about growth as the economy was growing at 3% a year.

Now, with the economy hardly growing, inclusive growth was the buzz phrase, Tshwete added.

Regarding his impressions of Gigaba, Coovadia said it was early days and the banks had yet to work with him.

“He is sending out the right message and we will give him the benefit of the doubt,” he added.

Coovadia said the downgrade by Fitch was “devastating, though not unexpected”.

Treasury said the Fitch downgrade was a setback and reaffirmed its commitment to the existing policy stance.

It added that government remained committed to the fiscal policy trajectory that had been outlined in the 2017 budget speech, as well as to state-owned enterprise (SOE) reforms, stabilising government debt and ensuring that the nuclear programme would be implemented at a scale and pace that South Africa could afford.

Fitch also expressed concern about the new nuclear build programme.

“Under the new Cabinet, including a new energy minister, the programme is likely to move relatively quickly,” Fitch said.

Building new nuclear power stations would increase government’s contingent liabilities, the agency added.

Sbongiseni Mbatha, president of the Association of Black Securities and Investment Professionals, said the Fitch downgrade was unwarranted.

He said the reasons given were unconvincing and bordered on bullying by the agency.

“They reacted harshly because they should have just been patient and not brought their rating announcement forward,” he said.

Narius Moloto, general secretary of the National Council of Trade Unions, said while the governing party could be blamed for the downgrade because of their recent public spat, the ratings agencies seemed to be colluding against the country.

Sizwe Pamla, spokesperson for labour federation Cosatu, said the Fitch rating – like that of S&P Global – should be treated with suspicion.

“Maybe these ratings agencies can go to hell,” he said, adding that the federation was concerned about the effect these downgrades would have on workers.

Dennis George, the general secretary of the Federation of Unions of SA, said the latest downgrade did not come as a surprise.

“We were expecting it. President Zuma and his government do not understand that people will not lend money to people they don’t trust to pay back. He is obsessed with having this country controlled by the Guptas,” he said.

George Sebulela, the secretary-general of the Black Business Council, said the timing of the downgrade, like that of S&P Global, was suspicious and the rating questionable.

Alan Mukoki, the CEO of the SA Chamber of Commerce and Industry, said the downgrade by Fitch was expected.

He added that it was unfortunate that government’s social programmes would be halted because of less money being available to it.

In addition, business would have less revenue and the smaller amount of tax available to spend would mean there would be less money for SOEs to embark on capital projects.

Looking ahead, Tshwete said Gigaba was planning a meeting next week with the CEO Initiative, a platform comprising CEOs mainly from the financial services and banking sectors, whose aim is to work together to boost investor confidence.

A spokesperson for the CEO Initiative confirmed that the meeting had been scheduled for next week, adding that Gigaba was likely to attend.

“The agenda is being finalised,” he said.

Gigaba was also looking to meet with labour leaders, said Tshwete.

He said Gigaba was planning to embark on an international roadshow later this month to Europe and the US.

In addition, Tshwete said Gigaba was looking to meet with the major rating agencies as well as former finance ministers Nhlanhla Nene and Trevor Manuel, after meeting with Gordhan this week.

Manuel declined to answer questions about restoring South Africa’s investment-grade rating and the recent Cabinet reshuffle.

Since being appointed finance minister, Gigaba had met with the ANC’s national working committee and its women’s and youth leagues to establish common ground among the political players, Tshwete said.