MONEY

What A Ratings Downgrade Means For You And Your Pocket

S&P has downgraded SA's currency rating to junk. What does this mean for ordinary consumers?

25/11/2017 06:09 SAST | Updated 25/11/2017 06:09 SAST
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Global ratings agency S&P Global Ratings on Friday evening downgraded South Africa's long-term local currency rating to 'BB+', or junk, from 'BBB-' with a stable outlook, while Moody's has placed the country on review to be downgraded, Fin24 reported.

Moody's, on the other hand, maintained its sovereign rating for SA at Baa3, which equates to BBB- in S&P's and Fitch's nomenclature. This is one rung above junk status, according to Business Day.

On Thursday, ratings agency Fitch decided to keep South Africa's credit rating unchanged, also at junk level.

Fewer jobs

When a country is considered junk, it basically means it is not investable. Investors are wary to put their monies in junk-rated economies because they aren't growing. As their investments leave the country, it means fewer job opportunities in South Africa.

Junk status is also especially worrisome for a country's lenders. They worry that the country will default on payments owed to them. To bridge this worry, they may charge South Africa higher interest rates. This means that the amount of money going to meet debt repayments will also increase -- and this affects consumers in the long run.

Petrol and food get more expensive

A downgrade might likely result in a weaker rand, thus increasing the price South Africa pays to get goods into the country such as oil and food -- subsequently pushing the price of these goods to make up for the shortfall. And as expected, within minutes of S&P's announcement, the rand had plunged from R13.88 to the dollar to R14.15, according to Times Live.

This means that inflation -- which is the sustained increase in the general price of goods will also increase. In response, the SA Reserve Bank might decide to increase interest rates to curb inflation, affecting our personal rate of borrowing. Servicing debt such as a credit card, loan, car and property repayments will also then cost us more.

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This will leave us with less money in our pockets for food and other household expenses.

South Africans may also find it harder to qualify for new loans and if they do, may pay higher interest rates.

A possible ratings downgrade is especially concerning in South Africa's case, as the country's debt already stood at more than R2-trillion in February, and "growing significantly", pointed out Nazrien Kader, managing partner at Deloitte Africa's tax and legal services.

"Currently our (fiscal) policy gives rise to what is called a deficit. This means that currently the government is spending more than the revenue (taxes) collected," explained Zothile Manqele, the founder of ZML Accounting Solutions.

"Moody's and S&P's have already cut us a lot of slack, what with cabinet reshuffles that happen overnight. My gut feel is that they will allow us to get through the ANC's elective policy conference in December -- which is an opportunity to address some fiscal issues, and then make decisions from there," pointed out Kader.

Until then, advises Manqele, "it is important for South Africans to be careful with their spending, save more and keep the bank account healthy, because oit goes without saying that our beautiful country is facing tough times."