By James Macharia
JOHANNESBURG (Reuters) - S&P cut South Africa's credit rating to junk status on Monday, saying the dismissal of Pravin Gordhan as finance minister threatened 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 cited the impact of divisions in the ANC-led government that led to leadership changes including Gordhan's departure 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.
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.
The move 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.
Spokesman Zizi Kodwa said the party's National Working Committee would meet on Tuesday before a decision was taken on how to handle the fallout from the sacking of Gordhan.
"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 as much as a further 2 percent to the dollar after the downgrade. Government bonds also fell sharply.
"We will be working closely with S&P's to ensure the issues they are raising are dealt with," Gigaba's spokesman, Mayihlome Tshwete said. "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, said on Monday he would pursue "tough and unpopular choices" to oversee growth and a redistribution of wealth to the black majority through radical economic transformation, 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.
It is unlikely to be easy in a divided ANC and with the economy expected to take a hit after Zuma's cabinet reshuffle unsettled investors.
The 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 being downgraded to junk status due to weak growth and the political upheavals after it got a reprieve last year.
S&P's move will lead to a rise in projected debt-servicing costs of 144 billion rand ($11 billion) in the 2016/17 fiscal year.
That 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.
South Africa's economic growth slowed to 0.3 percent in 2016 from 1.3 percent in the previous year.
"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 is expected to review its Baa2 rating, which is two notches above sub-investment grade, on Friday. Fitch, one notch above junk, is not bound by a timeline.
Fitch said on Friday Zuma's cabinet shake-up heightened political risk and signaled policy change, an outcome that risks the country's credit rating.
"This substantially raises the risk that Moody’s ... could similarly downgrade South Africa," Razia Khan, chief economist, Africa at Standard Chartered bank (LON:STAN), said.