South Africa’s junk status

LORINDA MARRIAN AND SAVANNAH PLASKITT

On 3 April, Standard and Poor’s (S&P) – an American financial services company who analyse stocks, bonds, and commodities and publish the results to assist investors – downgraded South Africa to junk status. S&P explained this decision in a statement saying, “In our opinion, the executive changes initiated by President Zuma have put at risk fiscal and growth outcomes. We assess that contingent liabilities to the state are rising. We are therefore lowering our long-term foreign currency sovereign credit rating on the Republic of South Africa to 'BB+' from 'BBB-' and the long-term local currency rating to 'BBB-' from 'BBB'. The negative outlook reflects our view that political risks will remain elevated this year, and that policy shifts are likely, which could undermine fiscal and economic growth outcomes more than we currently project.”

Sovereign credit rating impacts foreign direct investment and the ability of the country to loan money. Ratings from AAA to BBB- are considered “Investment Grade” while ratings from BB+ to D are described as “Junk Status”.
Perdeby spoke to UP Economics lecturer, Dr Reyno Seymore, to understand what the downgrade will mean for the average South African. According to Dr Seymore, “anyone can get a credit rating – it can be an individual, a company, or in this case the South African government…[T]his is not a rating for South Africa the country, this is a rating of the South African government.” Dr Seymore explained that institutions like Moody’s and S&P “look at a country or company and they say what is the chance that this government would be able to actually pay back the money that they borrow. And then they attach a rating to that.” He clarified that “independent institutions…give a country a rating and then people that lend money to the government will look at these ratings and say, ‘Okay, you know what? This is a risky borrower. I’m going to ask a higher interest rate.’ Or, ‘This is a safe borrower. I am going to ask a lower interest rate.’”
In terms of the impact of South Africa’s downgrade to junk status, Dr Seymore said, “…[M]ore than 90% of our debt is in domestic currency, local in South Africa, that is still investment grade. Less than 10% that is in international currencies [is what has] now been downgraded to junk. Now, many of these international investors that buy our debt have got a mandate from their clients that they are not allowed to invest in debt that is junk or below investment grade. So they must now get rid of this South African debt. So there is going to be an increase of supply that is going to push down the price, in other [words] interest rates will go up and to attract new people that are willing to lend money to us, we are going to have to pay them more interest…[T]hat’s the first major impact: that the interest that the South African is going to pay on debt will increase.” He points out that “if we must pay more interest on our debt, we’ve got less money available for other things…[E]ither we are going to need to cut expenditure somewhere like clinics or hospitals, infrastructure development, or we are going to need to increase revenue for government through taxes.”
Currently, the demand for foreign currency is lower, which Dr Seymour says means that “the rand is going to weaken, as we saw overnight […] Interest rates will either stay the same or maybe increase depending on the depreciation of the rand. So that’s going to affect consumers. Government services will be affected; consumers will eventually feel this in their pocket with higher prices and maybe higher interest rates eventually…It’s not a positive development, but we also need to realise that this is not the first time that [South Africa has] been [downgraded to] junk [status].” According to Dr Seymour, South Africa was given junk status under President Nelson Mandela, but was able to move out of it under President Thabo Mbeki.   
Dr Seymore further explained the downgrade in the context of household debt, stating that inflation is going to be influenced by it: “…[I]if you’re going to try to maintain your standard of living, you’re going to find out you can’t afford it…Either you’re going to cut your expenditure and bring down your standard of living somewhat and still come out alright with your money, or you’re going to need to borrow more money. [Borrowing money] also puts pressure on interest rates. Most households owe money to some kind of institution, so that will get more risky.” He indicated that the government needs more money in order to continue to pay for expenses, however “…now they need to pay back more interest on debt so now what’s going to be happening is we’ll probably see an upward pressure on tax so household debt will be affected by high interest rate, inflation, and then also pressure from government to maybe increase tax.”
Discussing the political impact of the downgrade, Heather Thuynsma, UP Politics lecturer, said that although it is too early to make a concrete prediction at this time, “South Africa’s political behaviour is determined on day to day economics and the impact on individuals’ lives. So we would have to see first, before we start forecasting [the elections in] 2019, we would have to see how it affects the policy conference coming up now in June/July for the ANC, how it affects the ANC’s elective conference at the end of the year, and based on that we will be able to see how shifts moved. […] From a voting and political behaviour perspective, inflation is going to have [a massive] effect because one of the things is that inflation immediately affects the price of basic living stuffs. […] People that are on fixed incomes, [such as] pensioners, what is going to happen to their food supply bill? What’s going to happen to their medical supply bill? Those kinds of things are going to affect people on the ground, and once that makes an impact then you’ll be able to determine much [more].”
Dr Seymore gave advice to students, urging them to “make sure that in tough economic times that you must differentiate yourself from the rest of the labour market. And you do that through education..”

 

 

 

 

 

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