Rating agencies are worried about the direction of economic policy - economist

On Wednesday evening, Reserve Bank Deputy Governor Francois Groepe said that countries that have been relegated to junk status by rating agencies have often ended up with interest rates a full 1% or 100 basis points higher as a result.

Isaac Matshego, an economist at Nedbank, explains the impact on interests rates subsequent to South Africa being downgraded to junk status by rating agencies, S&P Global and Fitch.

Stephen Grootes: What kind of impact can we expect to our interest rates

The Reserve Bank actually did do some research last year, indicating that a drop into sub-investment grade, which would raise South African interest rates by about 110 basis points. But basically what we expect is that interests rates are going to go higher because our cost of borrowing is higher.

Isaac Matshego, economist at Nedbank

But we must remember that most of our borrowing is in local currency so we are not likely to see that full impact of that percentage point.

Isaac Matshego, economist at Nedbank

Stephen Grootes: When interest rates go up by that much, it's going to have a big ripple effect across our entire economy?

The banks will pass some of that cost onto the consumer and the consumer will definitely feel that impact but I must highlight that the cost of borrowing particularly for mortgage in South Africa is driven mainly by changes in the prime rate. So it's all going to be the response of the Reserve Bank to this junk status.

Isaac Matshego, economist at Nedbank

Stephen Grootes: What would it take to get us out of junk status – I imagine it really is about politics at the moment?

The rating agencies are worried about the direction of economic policy and that is driven mainly by the political noise we've heard.

Isaac Matshego, economist at Nedbank

Listen to full interview in the audio below:


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