Last night, a 5.2 magnitude tremor hit parts of Gauteng, the second in 24 hours. It seems a fitting reflection of the monumental economic and political shifts that have hit South Africa since Thursday last week. First tremor: cabinet reshuffle; second tremor: downgrade to junk status by ratings agency, Standard and Poor’s, from BB+ to BBB-. Moody’s has placed us on review for a downgrade. The rand has fallen 2% since the announcement of the downgrade.
Reasons for the downgrade
According to EWN, S&P’s rationale is as follows:
1. The cabinet reshuffle reveals leadership divisions and puts policy continuity at risk
2. Poor financial performance of government parastatals places greater strain on government
3. Government and ANC divisions inhibit investor and business confidence and action
4. Slow economic rate, reflected in the contraction of 0.3% in the last quarter of 2016.
S&P has noted the independence of the Reserve Bank and South Africa’s monetary policy flexibility as positives.
S&P has also commented that the possibility of reversing the outlook to stable exists – dependent on the strengthening of fiscal outcomes and economic growth, and the reduction of political risks.
For all investors, it is a matter of maintaining a prudent approach and level-headed attitude to our financial planning, while we await the outcomes of this pronouncement. During times of uncertainty brought on by this and other downgrades, sticking to your long-term financial plan is critical. If you need further clarity, please don’t hesitate to contact us.