Downgrade to junk status - what does it mean?
While international markets worry about what a credit downgrade might mean for South Africa‚ an economist says most citizens were unlikely to feel a big impact immediately.
Chris Malikane‚ an associate professor of Economics at Wits University‚ said while “there is a lot of hype with the ratings agencies‚ the fact of the matter is that even if they cut the investment rate in South Africa‚ the average South African will not be much affected in the short-term.”
But the downgrade could in the longer term lead to higher interest rates‚ making it harder for families to pay for vehicles and their home loans.
The main thing a downgrade would bring‚ said Malikane‚ was is an increase in the risk premium‚ meaning lenders increase interest rates because of a perceived greater risk in default. The result is households with capital in investments and assets are going to be mostly affected.
Their net worth will decrease. But‚ Malikane noted “most households in South Africa don’t have the assets to be affected”. Where households could be greatly affected is credit lending.
A ratings downgrade will lead to lower access to credit and‚ potentially‚ an interest rate increase‚ which would affect many South Africans because they would be paying more to borrow money. Higher interest rates increase the cost of families paying for loans from banks‚ financing things like home loans and vehicle finance payments.
Additionally‚ Malikane said‚ the rand could decrease further in value‚ causing a rise in the price of imported goods. Economist Dr Azar Jammine said a downgrade would mean international investors wanting to buy bonds would be less inclined to buy South African government bonds. Jammine said if the rand fell in comparison with other currencies‚ inflation would not come down as much as anticipated.
“That is bad news for the whole economy‚ including small business.” Jammine said if the rand stayed where it is‚ the impact was not negative. “If the rand goes into free fall and reaches R16 or R17 to the dollar‚ inflation will rise‚ so will food prices and the petrol price will rise. Households will suffer.”
Jammine said there was nothing new Finance Minister Malusi Gigaba could do to appease investors. “He is seen as a Gupta acolyte.” KPMG said – before the downgrade to junk status was announced – that South Africa was perilously close to a sovereign ratings downgrade.
“This will result in an outflow of investment funds from bonds and equities as many local and international investment funds are mandated to place their money in investment-grade jurisdictions only. “This‚ in turn‚ will adversely affect the value of the rand‚ increase the cost of imports‚ and keep inflation elevated for longer‚” said Christie Viljoen‚ senior economist at KPMG South Africa.
Viljoen said uncertainty over the short-term trajectory of local politics would weigh on local and foreign investor sentiment – and hamper the investment needed to address South Africa’s challenges of unemployment‚ poverty and inequality.