Gordhan probe poses significant downgrade risk - economists

Johannesburg - South Africa's credit rating is set to be cut to junk status this year, according to a Reuters poll taken just days after police summoned Finance Minister Pravin Gordhan over an investigation into a suspected rogue unit of the tax service.

The Hawks is probing a surveillance department at the South African Revenue Service once headed by Gordhan and has led to speculation that he does not have President Jacob Zuma's political support.

Gordhan, who was finance minister previously in 2009-14, was recalled to the post in December to restore battered investor confidence after Zuma changed finance ministers twice in less than a week, triggering a sell-off in markets.

Zuma said on Thursday he has full confidence in the minister, but could not stop the investigations.

Nineteen of 23 economists surveyed by Reuters said that the investigation posed a "significant" risk of leading to a downgrade of South Africa's sovereign rating to speculative non-investment grade at Standard & Poor's December review.

The other four said it would be "marginally" significant.

The respondents overwhelming expected at least one agency to cut the rating to junk this year, with S&P seen the most likely.

"The probe raises doubt about whether Mr Gordhan has the political space to implement much needed fiscal reforms," said Rafiq Raji, managing director at Macroafricaintel Investment in Lagos.

The development also comes ahead of the October budget and after a successful international roadshow in March where Gordhan was accompanied by heads of business, government and labour unions singing from the same hymn sheet to tackle high unemployment and poor growth.

A Reuters poll shows that South Africa's economic growth is already expected to slow to just 0.2% this year from 1.3% last year and only recover slightly to 1.1% in 2017, which will put extreme pressure on the government's finances.

Heightened political risk

Both S&P and Fitch left ratings at BBB- in June, one notch above junk, however both agencies warned about the weakness of growth and heightened political risks.

Analysts have speculated that there was a plot to remove Gordhan from his position by allies close to Zuma.

Colen Garrow, economist of Lefika Securities, said elements which impact a credit rating are not only economic.

"In particular, the interference by the head of state on the operations of a vital organ of government has the potential to not only downgrade the sovereign credit, but to also prompt a (disinvestment) of capital from the country," said Garrow.

"Any discourse within National Treasury will therefore have an impact on South Africa's credit rating," he added.

Moody's rates South Africa two notches above junk but has it on review for a downgrade. Some analysts say agencies can cut two levels in one go to junk, although none confirmed that as a likely scenario in this poll.

If an actual cut to junk happens, the median response from 16 economists suggested the rand would lose about 7.5% in the aftermath against the dollar.

The 10-year-bond yield would likely rise by 50 basis points, although analysts are very uncertain as some said a rise as much as 200 basis points was possible.

Read Fin24's top stories trending on Twitter:

ZAR/USD
16.97
(+0.38)
ZAR/GBP
21.15
(+0.43)
ZAR/EUR
19.06
(+0.59)
ZAR/AUD
11.75
(+0.27)
ZAR/JPY
0.16
(+0.61)
Gold
1776.26
(+0.49)
Silver
17.96
(-0.08)
Platinum
807.48
(-1.37)
Brent Crude
42.09
(+1.84)
Palladium
1899.00
(-0.10)
All Share
54617.19
(+1.54)
Top 40
50309.77
(+1.49)
Financial 15
10214.89
(+2.12)
Industrial 25
76156.33
(+1.23)
Resource 10
50768.18
(+1.58)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
Results
I'm not really directly affected
18% - 1539 votes
I am taking a hit, but should be able to recover in the next year
23% - 2004 votes
My finances have been devastated
34% - 3007 votes
It's still too early to know what the full effect will be
25% - 2184 votes
Vote