Gordhan being charged likely to increase probability of downgrade - economist

The news that Finance Minister Pravin Gordhan has been charged with fraud and issued with a summons to appear in the Pretoria Regional Court early next month may increase the probability of a possible ratings downgrade later this year‚ says Tumisho Grater‚ economic strategist at Novare.

She said the news had seen political risk resurface.

“The Rand’s immediate reaction was to weaken by over 3%‚ breaching the R14.00 level. The local bond market saw the benchmark 10-year yield jump nearly 19 basis points to 8.88%‚ while the country’s perceived credit risk as reflected in the 5 year credit default swaps (CDS) spread reached a 3 month high to trade above 260 basis points‚” Grater noted.

Although the market reaction was very pronounced‚ it still fell short of the sharp reaction observed in December last year when former Finance Minister‚ Nhalanhla Nene‚ was suddenly replaced‚ she said.

“These developments may increase the probability of a possible downgrade later this year as it adds to the political uncertainty that ratings agencies have been flagging. There are now also unanswered questions regarding whether Gordhan will be able to deliver the very important Medium Term Budget Policy Statement later this month if the issue is not resolved.

“We now wait to see how the situation unfolds and if the uncertainty will cause a loss of confidence in South African assets which may be reflected in the further weakening of the Rand‚ higher bond yields and widening credit spreads.”