What does ‘junk status’ and a ‘downgrade’ mean for the average South African?

By Janice Roberts
Editor

By Lizl Budhram, Head of Advice, Old Mutual Personal Finance

What’s in the news?

South Africa’s economy entered a technical recession after gross domestic product (GDP) contracted by 0.7% in the first quarter of 2017. This news follows the recent decision made by Standard and Poor’s (S&P) last Friday, 2 June, to affirm South Africa’s sovereign credit rating, keeping the local currency credit rating at investment grade and the foreign currency credit rating at sub-investment grade. The ratings agency has, however, maintained its negative outlook, identifying political uncertainty and weak economic growth as potential risks. South Africa’s foreign and local currency credit ratings were both downgraded to non-investment grade by Fitch Ratings in April and they are currently on review for a downgrade by Moody’s.

What is a sovereign credit rating?
A sovereign credit rating is the credit rating of a country or sovereign entity given by a credit ratings agency, such as S&P, Fitch and Moody’s. These ratings agencies evaluate a country’s economic and political environment to determine a representative credit rating, which gives investors insight into the level of risk associated with investing in that particular country. The ratings agencies assess a country’s ability and willingness to repay its debt – making up both foreign and local currency denominated financial obligations – taking into account variables such as GDP growth, budget deficits and current account deficits. A credit rating downgrade makes it more expensive for the government to borrow money, as the cost of paying back debt rises.

How does this impact South Africans?
Although S&P decided to keep its rating the same, any future downgrade will lead to reduced access to affordable credit and‚ potentially‚ an interest rate hike. This would affect many South Africans who would have to pay more to borrow money. Higher interest rates increase the cost of personal loans from banks‚ home loans, vehicle finance payments and credit card debt. This would, in turn, hamper the economic growth we need to avoid further job losses and could also have a negative impact on foreign investment inflows, much needed given our low savings rate. While the most recent S&P decision is a relief, the country still has a lot of work to do in order to address issues like elevated political and policy uncertainty, which continue to put South Africa’s investment status at risk.

On a personal note…
While credit rating announcements may not immediately impact you, the rand is likely to fluctuate making imports more expensive, pushing up inflation and interest rates, and putting further pressure on budgets. To counteract rising interest rates and reduced access to credit, consumers should focus on growing emergency savings funds, and make a concerted effort to reduce personal debt.

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