FILE PHOTO: South Africa's President Jacob Zuma reacts during the launch of a social housing project in Pietermaritzburg
By James Macharia
JOHANNESBURG (Reuters) - S&P cut South Africa's credit rating to junk status on Monday, saying the dismissal of its respected finance minister heralded a damaging policy shift, while President Jacob Zuma readied for a showdown with other ANC leaders over the sacking.
In an unscheduled review that prompted a selloff in South African assets, the credit agency handed South Africa its first downgrade since 2000, citing the impact of divisions in the ANC-led government that led to leadership changes including Pravin Gordhan's removal on Zuma's orders late on Thursday.
"This has increased the likelihood that economic growth and fiscal outcomes could suffer," said S&P, which cut its rating by one notch to BB+ -- its highest non-investment grade mark -- and also assigned Africa's most industrialised economy a negative outlook.
Moody's later said later that it was placing South Africa on review for downgrade, and that it would assess the likelihood of changes in key areas of financial and macro-economic policymaking following Zuma's cabinet changes.
Zuma's dismissal of Gordhan, widely respected in financial circles, threatens to split the upper echelons of the ruling African National Congress down the middle.
Some pundits say Gordhan was the target of political pressure from a faction allied to Zuma, which has criticised his plans to rein in government spending, wrangled over the spending on a planned nuclear expansion as well as the running of loss-making state owned enterprises and the tax agency.
His sacking drew public criticism from Deputy President Cyril Ramaphosa, ANC Secretary General Gwede Mantashe and Treasurer-General Zweli Mkhize before Monday's regular meetings of the party leadership.
Zuma still had the support of Chairwoman Baleka Mbete and Deputy Secretary-General Jessie Duarte, marking a straight split among the party's "Top Six" leaders, sources said.
Late on Tuesday the president also won the backing of the party's influential women's league, which accused S&P of holding the country to ransom.
Party spokesman Zizi Kodwa said its National Working Committee would meet on Tuesday before a decision was taken on how to handle the Gordhan fallout.
"The ANC must remain and it must emerge stronger than it was last week," Kodwa said.
New Finance Minister Malusi Gigaba said earlier on Monday he had spoken to the ratings agencies, and informed them he would maintain Pretoria's current fiscal stance.
His appointment hit an already weak rand currency.
The currency has fallen 11.5 percent since last Monday, when Zuma ordered Gordhan to return home "immediately" from an investor roadshow abroad, and it fell by more than 2 percent after the downgrade. Government bonds also sank.
"We will assure them that although the political environment is a bit concerning, we should be clear that we have all agreed to the same policy direction," Gigaba's spokesman, Mayihlome Tshwete said, referring to S&P.
Gigaba, said on Monday he would pursue "tough and unpopular choices" to oversee a redistribution of wealth to the black majority, a stance echoing recent comments by Zuma.
NO EASY ANSWERS
Gigaba has so far given no details of how the transformation would be carried out. The Treasury said he would brief the media on Tuesday.
It is unlikely to be easy given a divided ANC and with the economy now expected to take a further hit.
Opposition leader Mmusi Maimane, head of the Democratic Alliance, blamed Zuma for the downgrade.
"Zuma has just ended the chances of South Africans to create and find work," Maimane said on his Twitter feed. "We should all downgrade him #ZumaMustGo."
Maimane has called for a no-confidence vote against Zuma and a protest march on Friday in the commercial hub of Johannesburg.
South Africa has been facing the risk of a downgrade to junk due to a weak economy -- growth slowed to 0.3 percent in 2016 -- and political upheavals.
S&P's move will almost certainly lead to a rise in government debt-servicing costs, which will mean less money for critical services such as housing, education and sanitation, which could incite even more protests over service delivery that have already rocked towns across the country.
"The road to #JunkStatus recovery will be long & arduous. And it won't be possible with current policy and politics in place," political analyst Daniel Silke said.
"Today's decision was hardly a surprise," John Ashbourne, Africa analyst at Capital Economics, said in a note.
"The loss of the rating will bolster opponents of President Zuma, who will use it as evidence that his recent reshuffle is harming the country."
Moody's had been expected to review its Baa2 rating, which is two notches above sub-investment grade, on Friday, but it was now unclear when it would issue its review.
"Moody's could downgrade South Africa's issuer rating if the rating agency were to conclude that recent events signalled a deterioration in the effectiveness of government or in the credibility of its policy-making," it said.
Fitch said on Friday Zuma's cabinet shake-up heightened political risk and signalled policy change, an outcome that risks the country's credit rating.
"Many are wondering if the need to put the sovereign on specific review for a downgrade raises the risk of a two-notch downgrade," Razia Khan, chief economist, Africa at Standard Chartered bank, said.
(Additional reporting by Mfuneko Toyana; Editing by Sandra Maler)