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Cape Town - South Africa's sovereign rating on its bonds are now much closer to junk status than before the removal of former finance minister Pravin Gordhan and his deputy Mcebisi Jonas in President Jacob Zuma's Cabinet reshuffle last week.
This is the view Professor Andre Roux, economist at the University of Stellenbosch Business School.
It follows news reports that South Africa could have its rating downgraded to junk status as soon as Monday by Standard & Poor's. This comes as the rating agency reportedly had an emergency meeting at the weekend, according to Business Day.
S&P and Moody's both have South Africa one notch above junk status, while Moody's - which will release its latest review update on Friday - has South Africa two notches above junk status.
South African banking shares, which lost more than R80bn of its value on Friday after president Jacob Zuma’s controversial cabinet reshuffle, continued their decline on Monday although the losses were somewhat slower. The top banking shares, which were all about 10% lower over the past seven days, all traded lower.
READ: Resources, gold up while banking share continue decline on JSE
Roux told Fin24 that a junk bond rating means that it will be more difficult and/or more expensive for the SA government to borrow money in order to finance expansion plans.
"A junk bond status might mean the difference between moderate growth and recession for the SA economy. It will also postpone or delay any decision by the SA Reserve Bank (SARB) to lower interest rates as the bank is playing it careful," said Roux.
"Junk bond status would also mean a far more volatile exchange rate, which we are starting to see. Household incomes then would probably decline and many more households would be plunged into poverty."
"The obvious question remains: What impact will the Cabinet reshuffle have on the fragile and tentative economic recovery here in South Africa? As things stand now, we must be much closer to a junk bond rating than a week ago – despite the fact that the broad macro-economic environment is more favourable than last year," said Roux.
He added that even in the event of a junk bond rating, the initial market reaction might be fairly innocuous if bond holders have already factored a downgrading into their transactions.
"In the longer term, the negative impacts of a downgrading are well known: higher costs of borrowing, a slowdown in economic growth, a decline in real incomes and an increase in poverty," cautioned Roux.
At the same time, he pointed out that the market reaction to last week’s axing of Gordhan and Jonas has been "remarkably muted". In his view, this is likely because the president's move was not entirely unexpected.
"For many the question had been not so much whether they would be dismissed, but rather when," said Roux.
He explained that last week's Cabinet reshuffle by Zuma was unlike what happened in December 2015, when he fired Nhlanhla Nene as finance minister without any prior warning.
READ: Gordhan, Jonas: The end of Treasury's bromance
"Consider also the fact that market players in the US, the UK and elsewhere in Western Europe are probably more preoccupied with their own domestic concerns like Brexit, Trump and immigration," said Roux.
"To a large extent, of course, the markets are probably waiting for more clarity on the outcome of the now clear division of allegiances within the ruling party. And even then the reaction to unfolding events is unclear."
Roux said at the one extreme, if Zuma survives "the current onslaught" this will probably be seen as a triumph for populism, as well as state capture and rent-seeking behaviour. In this case, "the markets are bound to act negatively and possibly vehemently as they show their dismay".
At the other extreme, Roux said that if Zuma is ousted, it will probably be interpreted "as a victory for the sanctity of the Constitution, and all it stands for, as well as a nod in favour of fiscal rectitude and common sense".
He expects that in reality, the pendulum will probably swing between these two extremes over the next few weeks or days.
"As markets tune into the rumour mill, as they garner their own inside information and read between the lines, regular - and at times violent - swings in the prices of foreign currencies, share prices and bond rates could become the norm," said Roux.
At the same time, he added it is important to bear in mind that a change in leadership will not result in an overnight economic miracle.
"There are a number of additional underlying causes of SA’s disappointing growth performance, not least of which is the lack of and/or inefficient use of appropriate skills and inadequate savings," said Roux.
Sanisha Packirisamy, economist at MMI Investments and Savings, said on Monday that before the recent political saga broke out, SA ten-year government bonds had rallied around 47 basis points relative to February 28 2017.
"Nonetheless, yields climbed back up to 8.9% late in the month, responding to negative political headlines," she said.
The Inflation-linked Bond Index (ILBI) dipped marginally by 0.5% for March 2017, while the FTSE/JSE Listed Property Index performed slightly better, ending the month marginally in the black.
