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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.

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