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Fitch downgrades South Africa to junk after Zuma's cabinet reshuffle

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Fitch downgrades South Africa to junk after Zuma's cabinet reshuffle

South Africa has lost its second investment-grade credit rating in less than a week, as Fitch Ratings downgraded the country following President Jacob Zuma's recent cabinet reshuffle.

The agency cut South Africa's long-term foreign- and local-currency issuer default ratings to BB+ from BBB-, with a stable outlook, saying recent political events including the firing of Finance Minister Pravin Gordhan "will weaken standards of governance and public finances." S&P Global Ratings had cut the country's long-term foreign-currency rating to BB+ on April 3, while Moody's the same day placed South Africa's Baa2 long-term ratings on review for downgrade.

Fitch also downgraded the country's short-term foreign- and local-currency issuer default ratings and the rating on the short-term local-currency securities to B from F3. At the same time, the country ceiling was revised down to BBB- from BBB.

Fitch said the dismissals of Gordhan and Deputy Finance Minister Mcebisi Jonas were likely to change the direction of the country's economic policy, undermining, if not reversing, progress in the governance of state-owned enterprises. That, in turn, could raise the risk that the enterprises' debt migrates onto the government's balance sheet.

In particular, Fitch flagged concerns that state electricity supplier Eskom's plan to build nuclear power stations is likely to mean an increase in treasury guarantees to the company, increasing the government's already-sizable contingent liabilities.

The new finance minister, Malusi Gigaba, has committed to maintaining fiscal policy, Fitch noted, but the agency expects fiscal consolidation is expected to take a back seat since Zuma is focused on "radical socioeconomic transformation."