News broke on Monday evening that South Africa had been moved to junk status by S&P. We took a look at what it means for you!
Published: Tuesday, April 4th 2017
News broke on late Monday afternoon that South Africa had been downgraded to junk status by rating agency Standard and Poor’s (S&P). The agency blamed the shift on the fact that they had lost confidence in the South African government after the reshuffling of the cabinet. S&P stated that the country had lost the confidence of key investors due to the risky and unnecessary shuffle.The country reeled from the news. News stations and social media alike descended into frenzied panic over the news, and calls for President Zuma to fall increased. The Rand was also affected by the news, taking a sharp drop to R13.70, but ended up stabilising slightly toward the end of the day.This, however, is not expected to last too long. Analysts state the more bad news is on the way. The other rating agency, Moodys is also expected to downgrade the country to junk.
Let’s imagine that South Africa is a living, breathing human. This human has a job, credit cards, a home and a car. Due to some malpractice and reckless behaviour at work, this person is demoted, and will start earning less. With the lower income, this person will battle to get a loan and more credit. They will also start paying more interest on the existing debt that they have. Because less people trust them with money, they will essentially be earning less and paying more. In essence, this person will need to start working pretty hard to regain confidence.This is essentially what is happening with the South African economy. The news of the sacking of Gordhan, together with the other Ministers sent investors packing their bags. Gordhan and his deputy had been working incredibly hard to win over investors by convincing them that South Africa was a good place for them to place their money. It was during these presentations to investors in fact, that Gordhan was called back. If that doesn’t kill the confidence of investors, we don’t know what would!
So, who is this company who has decided that our credit rating deserves to be among the lowest in the world? Standard and Poor’s is a rating agency that has been providing financial market intelligence internationally for the last 150 years. It is the leading index provider and is an independent provider of credit ratings. It is among the three top rating agencies in the world, including Moody's Investors Service and Fitch Ratings. You will recall that last year, there were that Moody’s was going to downgrade us.
What Does This Mean For You
Although the news of the downgrade is bad news for the economy, the most impacted will be small and medium businesses for now. The short-term pinch will not be felt by individuals just yet, however, this might not last too long. Short-term, citizens will be only be watching for a change in the Rand. The long term effects could impact households a bit more. The downgrade will eventually push lenders and financial institutions to push up their interest rates. Therefore, should you have a home loan, credit card or are financing a car, your repayments on these could be going upA long-term effect could also see the value of the Rand declining. This could, in turn, have a huge impact on the cost of food and imported good. Should the Rand go into freefall, which is entirely possible, it could hit the R16 or R17/$. If this does happen, basic living costs will start soaring. With the Rand value dropping, the price of petrol will increase. That translates into higher food costs and a higher cost of living for ordinary South Africans.
Not only will this happen, but interest rates will increase. So, not only will you be paying more for basic living, but you might be placed in a position where you will struggle to pay for your car, home and credit cards.Another long term effect is the increase of taxes (again). Government currently borrows money to pay for its debt. Banks and financial institutions are not allowed to invest in junk status debt. So the government will need to find the funding somewhere, most likely from its citizens, thus increasing taxes.Essentially, the heightened political risk of the government has severely devalued the economy and might eventually put ordinary citizens like you and I, in severe amounts of debt.