How #JunkStatus affects your pocket
03 November 2017
The threat of being downgraded to junk status, casts a shadow over South Africa’s future and the prosperity of its citizens. Newspapers headlines, Twitter trends and braai chat regularly weigh-in on ‘mission: avoid junk status’. Before you start stocking up on tin food and batteries, we thought it wise to have Chris Gilmour, investment analyst at Absa Wealth & Investment Management, unpack it all.
Ratings agencies. There are three big players: Moody’s, Standard & Poors (better known as S&P) and Fitch Ratings. Their job? They rate debtors’ (in other words, countries or corporates) ability to repay debt.
“If we were to be relegated to junk status, it just means South Africa is going to have to pay more, to raise the money it needs for economic growth, key projects and service delivery,” says Chris. He elaborates on what this means, “Like individuals approach a bank for a homeloan to buy a house, governments source financing from international financial markets to fund key projects like new roads and power plants .”
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 two of the three ratings agencies put us into junk status, how might it affect your own pocket? Interest rates are likely to rise, thus increasing the monthly cost on things like home loans 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 good into South Africa. Overseas holidays? Parys is charming in spring.
How would 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, “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. “If we were 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.
“Our interest rates are probably discounting our descent into junk status already. The latitude for interest rates to go up significantly higher from these levels may be limited. That can be construed as wishful thinking and we’ll only really know if and when it happens. We’re actually not that bad. We do have a plan.”
Hypothetically – what if the rise in rates we’re currently faced with is not discounted? Chris’ answer is tough to face, “The ability of your average consumer to repay their debt is going to be very compromised. They’re not going to be proportionally linked wage increases. It’s going to mean the consumer is under relentless pressure – particularly the consumer who is indebted.”
Chris’ advice? “If you’re heavily in debt at this point in time, and we were to be going into junk status, best you get your indebtedness down significantly.”
Here are a few scenarios that illustrate what a rise in interest rates might cost you:
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.