Fitch Ratings Inc on Friday dropped its outlook for South Africa from “stable” to “negative,” citing the country’s recent political turmoil under South African President Jacob Zuma.
Zuma has been engulfed by graft scandals and a power struggle with South African Minister of Finance Pravin Gordhan, while economic growth has fallen to 0.5 percent and unemployment has hit a 13-year high.
“Political risks to standards of governance and policymaking have increased,” Fitch said in a statement, confirming that it kept South Africa’s credit rating at one notch above “junk” status.
The credit reviews could further drain investor confidence in the country’s prospects under Zuma and the African National Congress (ANC) party, which has ruled since the end of apartheid.
“The infighting 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,” it added.
Like Fitch, Standard & Poor’s Financial Services LLC (S&P) has South Africa rated at the lowest investment grade. S&P is to make its key announcement on Friday. 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 South African National Treasury said after the Fitch announcement, while acknowledging the concerns over political uncertainty.
Gordhan was earlier this month scheduled to appear in court 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 and South African 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 report by a watchdog included allegations that Zuma ensured one business family won huge preferential contracts to supply Eskom with coal.
Zuma on Friday said 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 said.
“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,” it added.
Fitch, which said South Africa’s banking sector “remains a rating strength,” forecast GDP growth of 1.3 percent for next year and 2.1 percent in 2018.
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