South Africa is being reviewed this week by Moody’s rating agency which has a negative outlook on our economy.
The probable downgrade to BAA3 will bring it inline with Standard and Poors and Fitch which have already downgraded us to their equivalent BBB-.
The next notch is categorised as “Non-investment grade speculative” otherwise known as “Junk” status.
Here are some links which explain the details:
What does this mean for South Africa?
Most of our national debt is raised through bonds. These debt instruments offer a fixed rate of interest for a defined period with a commitment to repaying the original capital at the end. South Africa needs to generate enough income through growth to pay it’s debt obligations. Servicing the cost of debt is one issue, however, the country needs to be economically sound to repay the original amount borrowed as well. The rating points to the risks of defaulting on this obligation as growth forecasts are weak placing a strain on being able to cover expenditure.
There are global investment companies which have rules that disallow them to invest in countries with a “Junk” status. So future borrowing will be even tougher for South Africa.
Following what happened to Brazil when it was down graded to “Junk”, the cost of borrowing will increase, the currency will weaken and the Reserve Bank will continue raising interest rates.
What this means for South Africans
The probable weakening of the rand will lead to a rise in inflation as we will pay more for imports, which will lead to a rise in interest rates which will deplete our ability to save.
Research shows that it takes around 7.5 years to for a country to recover from a junk status rating. This poses a gloomy outlook for us, especially as households are already on their knees struggling to make ends meet.
What can we do?
Avoid our own personal downgrade by getting tougher with ourselves.The cost of debt which rise faster as interest rates hike. Forget the illusion of getting through tough times by borrowing. Instead, nail down your exposure to debt and focus on being able to afford your lifestyle .This way you will be able to cope far better if and when the storm arrives. You will also protect your creditworthiness keeping you in good standing should you need a loan in the future.
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Read more from Paul Roelofse at www.investforlife.co.za