Published On: Tue, Apr 4th, 2017

How Junk status affects your pocket

randsJOHANNESBURG – Being downgraded to junk status casts a shadow over South Africa’s future and the prosperity of its citizens.
Chris Gilmour, ‎Investment Analyst at Absa Wealth & Investment Management, unpacks it all.
There are three big players- Moody’s, Standard & Poors (better known as S&P) and Fitch Ratings. Their job is to rate debtors’ (in other words, countries or corporates) ability to repay debt. “Junk status means South Africa is going to have to pay more, to raise the money it needs for economic growth, key projects and service delivery. He elaborates on what this means: “Like individuals approach a bank for a home loan to buy a house, governments source financing from international financial markets to fund key projects like new roads and power plants.”said Gilmour
The ratings agencies evaluate a country based on a range of variables that gauge stability and predictability, such as economic performance, unemployment rates and inflation. If the other ratings agencies also put us into junk status in the next few days, how might it affect your own pocket? “Well, interest rates will most likely rise, thus increasing the monthly cost on things like home loan and vehicle finance repayments. We may also find that the rand loses further ground against international currencies, which would increase the price that we pay to import foreign goods into South Africa.”
How could South Africa fix this?
“The credit agencies would need to see that South Africa has a robust plan in place that yields tangible results.”
Chris simplifies this:
“On average, if we do all the right things, it could take South Africa anything between five and seven years to get out of junk status. We would have to convince the rating agencies that we can display that we’re not going to allow wasteful expenditure to take place on a big scale.”
Essentially we’re going to have to find a balance in how we spend our money. Let’s take the average South African who has a home loan, vehicle finance, perhaps a personal loan and a credit card. “Being downgraded to junk status, we could conceivably – over time – be paying 2-3% more to service this debt,” says Chris. “Perception is everything when it comes to ratings. As long as SA has a plan in place, we can regain a better rating.”
Chris’s advice to consumers as we face a rise in interest rates: “We will see no proportionally linked wage increases in the near future and the ability of your average consumer to repay their debt is going to be hugely compromised. It’s going to mean the consumer will be under relentless pressure – particularly the consumer who is already over-indebted.”
“If you’re heavily in debt at this point in time, best you get your indebtedness down significantly. And if you find yourself struggling to cope with your financial commitments, speak to your bank early on, to see what plans can be put in place to assist,” he concludes
-CAJ News

Featured Video