South Africa’s Political Woes Trigger Credit Downgrade, Market Chaos

Standard & Poor’s (S&P) caught many people by surprise last week when it cut South Africa’s sovereign rating, exacerbating the nation’s biggest political upheaval in recent memory.

S&P Global Ratings cut the country’s sovereign credit rating to junk – the first such downgrade in 17 years. Analysts say the downgrade could cost South Africa roughly $10 billion in higher borrowing costs and lost investments.[1]

S&P said political uncertainty “had increased the likelihood that economic growth and fiscal outcomes could suffer.”[2]

However, the agency did offer one last glimmer of hope in its assessment of South Africa’s situation:

“We could rise the outlook to stable if we see political rising reduces and economic growth or fiscal outcomes strengthened compared to our baseline projections.”[3] The losses intensified after the credit downgrade.

The downgrade was apparently triggered by a dubious cabinet reshuffle that culminated in the sacking of finance minister Pravin Gordhan. The cabinet overhaul triggered a large drop in the nation’s currency and put other credit rating agencies like Moody’s on high alert.

Gordhan, who was leading efforts to avert the downgrade, had been locked in a bitter power struggle with the presidency over efforts to crack down on the government’s cronyism and dismal management.[4] Zuma’s government appears to have silenced Gordan, at least for now.

The South African rand has plunged more than 12% against the U.S. dollar over the past two weeks, sending the USD/ZAR exchange rate to its highest level of the year.

Analysts say South Africa’s political crisis and ensuing credit downgrade couldn’t have come at a worst time. The country is struggling with massive unemployment and dismal economic growth. The country’s jobless rate is at more than 27%.

The domestic banking sector is also under pressure, with rising indebtedness keeping many consumers and investors on the sidelines.[5]

The International Monetary Fund (IMF) says the South African economy will grow less than 1% this year.

Growth amounted to a meagre 0.3% in all of 2016.

Stocks and broader markets with exposure to South Africa could face a prolonged period of uncertainty as the country struggles with a myriad of challenges. The fundamental picture suggests further volatility is in store.

[1] Barry D. Wood (April 7, 2017). “Opinion: South Africa’s latest political drama could split the ruling party.” Market Watch.

[2] Callum Jones (April 4, 2017). “South African political upheaval weighs on market.” The Times.

[3] Jacob Zuma (April 5, 2017). “After the downgrade: South Africa should copy Brazil and impeach the president.” Times Live.

[4] Joseph Cotterill and David Philling (April 3, 2017). “S&P 500 cuts South Africa credit rating to junk amid political crisis.” Financial Times.

[5] Dawn Kissi (February 18, 2017). “South Africa’s political woes couldn’t come at a worse rime from its troubled economy, analysts say.” CNBC.

The post South Africa’s Political Woes Trigger Credit Downgrade, Market Chaos appeared first on Forex.Info.

Source:: South Africa’s Political Woes Trigger Credit Downgrade, Market Chaos

easyMarkets
About the Author
With over a decade of trading expertise and 100,000 fulfilled clients in 160 countries worldwide, easyMarkets will tick all your boxes whether you are a new or experienced trader, affiliate or introducing broker.
Trade 300+ markets including currencies, commodities, metals, vanilla options and indices from one place without the jargon, complicated offers and confusing terms!
Welcome to the exciting world of trading. Welcome to easyMarkets.

Related Posts

Leave a Reply

*