What does S.A.’s Downgrade to Junk Status mean for you?
Cii Radio| Ayesha Ismail| 04 April 2017| 06 Rajab 1438
Standard & Poor’s Global Ratings’ has downgraded South Africa’s credit rating to junk status and Moody’s has moved to put the country’s credit rating on review for a downgrade, but what does this mean for you?
Rian le Roux, head of economic research at Old Mutual Investment Group, says the poor will be affected the most.
But how will the poor, the middle class and everybody else be affected?
The first thing is that the rand will weaken and interest rates will remain high and as a result, the following will most likely happen:
• When it comes to repaying your debt (home loans, car repayments), if inflation stays high, the Reserve Bank can’t lower interest rates. You may pay more to repay your debt in the second quarter.
• Your pension fund is safe. For now.
• You will experience slower income growth, meaning your salary increases don’t look that good because economic growth does not look good.
• If you are looking for a job it will be harder to find one because the job market is now at risk.
• Jobs are also at risk; some sectors might experience a lot of retrenchments.
• Investments, over time, will not grow because the prospects for prosperity have been dimmed by the downgrade.
Goolam Ballim, Standard Bank Chief Economist, adding to the conversation says it will be difficult for South Africa to get out of this ratings downgrade because of our political instability.
“We are hamstrung by a toxic political environment.”
Ballim argues that the financial system is founded on trust and when President Jacob Zuma went ahead with the Cabinet reshuffle, he breached that trust.
“When he removed Pravin Gordhan, while this is not necessarily an indictment on his successor, unfortunately, Minister Malusi Gigaba does not have the credentials to be able to inject that trust.”
There is a severe impact all round and there may be more bad news on its way, so prepare to tighten your financial belt even more.
Rand Already Losing Ground Against Major Currencies Following Downgrade
The market has just opened and while investors start digesting the implications of the downgrade at this hour, the rand has already started losing ground against the dollar.
The local currency lost around 2% on Monday following that decision by ratings agency Standard & Poor’s Global.
This morning, it has lost a further 1% and is expected to get weaker should rating agencies Moody’s and Fitch also decide to downgrade the country.
Moody’s, which has South Africa at two notches above junk status, has now also placed the country on review for a downgrade.
A ratings downgrade does not bode well for the country’s ability to borrow money and is expected to have negative effects on South Africans in the long term.
Head of the Johannesburg Stock Exchange Nicky Newton-King says this is very bad news.
“There will be less for service delivery, for the very much vulnerable people in our society. It would mean much-delayed opportunity to really build growth and put the local market under pressure.”
The Announcement Was Not Unexpected
There has been general shock by economists to the decision of Standard & Poor’s Global to downgrade South Africa to junk status.
Rating agencies had warned that political instability in the country could lead to a downgrade.
S&P Global has become the first agency to make the move, downgrading the country to BB+ from BBB minus.
The agency has highlighted the executive changes initiated by President Jacob Zuma, saying these have put at risk fiscal and growth outcomes.
Nedbank Economist Isaac Matshego says: “The announcement was not unexpected but these things, when they happen, they still shock us.”
Investment Solutions Lesiba Mothata says there may be more bad news.
“We may have two rating agencies having downgraded South Africa to junk status in under a week.”
Argon Asset Management’s Thabi Leoka says: “They did warn us that they will downgrade us if they felt that politically, politics undermine economic policy adoption.”
Source – EWN news