Junk status looming, says prominent economist

The big three ratings agencies are all due to review SA's credit rating over the coming months. S&P have reportedly brought their review forward, making a possible downgrade imminent. 

South Africa is still reeling from President Jacob Zuma's shocking cabinet reshuffle, which saw the axing of Finance minister Pravin Gordhan. 

Jammine says government's focus on 'radical economic transformation', together with increased spending, will have a negative impact on the credit rating.

South Africa has an "edge of junk" rating of BBB- from S&P and Fitch. Jammine says several factors will be taken into account during the review. 

"South Africa's rating will firstly be determined on its fiscal consolidation. This is the extent to which a country commits itself in maintaining a decent balance between how much it receives in taxes and how much it's spending. S&P will also investigate the management of state-owned enterprises. Some enterprises are provided with guarantees to improve efficiency and effectiveness. Therefore if badly run, government is forced to call upon the guarantees which effectively increases government's debt and jeopardises the solvency of its debt. Lastly for a better credit rating, faster economic growth is needed." 

Jammine says the political uncertainty over the past week weakened the rand significantly. This creates an environment where business loses confidence and becomes unwilling to invest. Jammine says this, in turn, leads to weaker economic growth and lower tax revenues.

"This is why the past week's developments have been so negative for the economy and why the rand has depreciated so sharply. If we do get downgraded, there will be fewer investors willing to buy South African government bonds. The government will then have to offer a higher rate of interest in order to attract buyers for its bonds. And that costs money."