Cape Town – The fact that an unaffordable nuclear build programme may get the green light was cited by Fitch Ratings which downgraded South Africa’s sovereign credit rating to junk status, said Sanisha Packirisamy, economist at Momentum Investments in a company note on Friday.
Fitch became the second ratings agency to downgrade South Africa to junk status in a matter of one week.
It cited President Jacob Zuma’s overnight Cabinet reshuffle and a potential change in economic policy direction among the reasons for the downgrade.
Fitch also however cautioned that differences over South Africa’s expensive nuclear programme may have contributed to the reshuffle and under the new Energy Minister Nkhensani Kubayi the programme is likely to move “relatively quickly”.
Under the finance ministry of Nhlanhla Nene, who was removed on 9 December 2015, National Treasury said Eskom could not absorb the nuclear programme with its approved guarantees at the time.
A nuclear build programme would increase contingent liabilities, Fitch said, which are already “sizeable”.
Fitch noted that the South African government has repeatedly needed to support state-owned entities, including Eskom, which is responsible for a large share of liabilities.
National Treasury on the other hand stressed in a statement in response to Fitch’s downgrade that South Africa would ensure the nuclear procurement will be transparent and “implemented at a scale and pace that the country can afford”.
It now depends on the ANC and policy direction
Packirisamy said if there are positive political and economic policy responses from within the ANC, favourable political developments and policy adjustments the downgrades could eventually result in a return to investment territory in a couple of years.
In contrast, should there be a denialist response, accompanied by ongoing factionalism, patronage and fiscal slippage there is likely to be a trend of continual ratings downgrades in coming years.
In such an environment ongoing rand weakness, with global asset classes outperforming local ones, and local cash and equities outperforming local fixed-income investments, could be in store for South Africa.Read Fin24's top stories trending on Twitter: Fin24’s top stories