S&P has cut South Africa’s foreign and local currency ratings by one notch each, while keeping the outlook for both ratings on negative. At BB+, the foreign currency rating is now non-investment grade. The BBB- local currency rating is still investment grade.

The timing of S&P’s downgrade was a surprise given that the review was due for June. While we had anticipated a downgrade this year, the earlier than anticipated move and the negative outlook, which suggests that there could be further downgrades down the line, speaks to the heightened political uncertainty. S&P emphasized that divisions in the ANC leadership that have led to changes in executive leadership have put policy continuity at risk. The agency noted the negative implications that this will have on business confidence. Furthermore, there is increasing likelihood of greater government support to SOEs, particularly in the energy sector, Sanral and SAA.

The market reaction has been relatively contained suggesting that the market had priced in the downgrade, following the cabinet reshuffle. However, further rand weakness along with the anticipated decline in business confidence will undermine GDP growth and push inflation higher. As such there is downside risk to our macroeconomic forecast.

We expect the other credit rating agencies to follow S&P in due course. Fitch has already expressed their concerns over recent political developments and Moody’s will issue its credit rating decision after concluding its downgrade review that could take 30 to 90 days.