How A Downgrade to Junk Status Affects You

As you all know by now, S&P global downgraded South Africa’s local currency to junk status about three weeks ago and Moody’s placed us on a downgrade review. After the Medium Term Budget Policy Statement by Finance minister Malusi Gigaba, I think a downgrade was inevitable. So now that we have been downgraded, how will it affect us.

Credit rating agencies rate companies/governments based on their ability to pay back their debt. Organisations are either placed in the Investment Grade or the Sub-Investment Grade (Junk status) category. There are also different levels within these categories so a down grade does not always mean junk status and even though we are officially in S&P’s sub-investment grade category, we are at the top of that category (it could be worse). However, this means that it will be more difficult for the government to access credit and the interest on the credit will increase resulting in more money being used to service government debt. This will add to the existing gap in our government budget, which the president plans to make up for by increasing taxes.

There is also the risk of investors selling out of government bonds (some investment funds only invest in investment grade organisations). This could result in a weaker Rand meaning the cost of food and petrol will increase (we already saw an increase in petrol prices last week). The price increases could then lead to a higher inflation rate resulting in an increase in interest rates by the South African Reserve Bank. Therefore we will be paying more for food, petrol, home loans, car instalments and possibly also paying higher taxes.

The are many people who believe that we should not pay too much attention to the opinions of rating agencies. I think it doesn’t matter wether or not we believe in these agencies, fact remains that their opinions have the potential to affect the quality of our lives and so for that reason we should make sure we stay in their good books.

 

 

 

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