Fitch also downgrades S.A to junk status

Fitch Ratings has dealt a major blow to South Africa by downgrading the country's long-term foreign and local currency ratings to junk status. The outlooks for both have been deemed stable, reflecting Fitch's concerns over recent political events, including a significant cabinet reshuffle, which are anticipated to weaken governance standards and public finances in the nation. Peter Attard Montalto, an Emerging Markets Economist at Nomura International, discussed these developments with CNBC Africa, shedding light on the potential implications and reactions to this downgrade. This downgrade comes as a significant setback to South Africa, dashing hopes for an economic resurgence this year. While the move was not entirely unexpected, the language used by Fitch was notably strong, indicating not just the risks of institutional degradation but an expectation that such deterioration would occur imminently. Fitch's stance on the nuclear sector was particularly forceful, underlining the severity of the situation. The immediate impact of this downgrade has already begun to materialize, with JP Morgan announcing its decision to exclude South Africa from various investment grade-related indices. This decision is poised to trigger outflows from the country's debt markets by the end of May. The removal of South Africa's debt from JP Morgan's bond index is a significant development, given the global influence of the firm's indices on investor decisions. The repercussions of being dropped from these indices have been estimated to result in approximately six to seven billion rand flowing out of external debt markets, along with one to one and a half billion rand exiting local markets. However, the most substantial impact is anticipated to stem from Citigroup's potential move regarding the Whigby index, contingent on Moody's downgrading South Africa to sub-investment grade on the local rating. While this scenario is projected to unfold over the next 12 months, Moody's current assessment appears to lag behind the unfolding events in South Africa. As the country grapples with the ramifications of this downgrade, policymakers and stakeholders are left to strategize on how to navigate the evolving economic landscape and restore confidence in South Africa's financial outlook. The road ahead is fraught with challenges, but concerted efforts to address the underlying issues identified by Fitch and other rating agencies will be crucial in steering South Africa towards financial stability and institutional resilience.