#JunkStatus - Looking to the future

Our country’s recent downgrade to junk status has put a lot of South Africans on edge – and with good reason. With South Africa seemingly marching to the beat of her own drum, the country’s financial status seems at odds with other emerging markets, many of whom are experiencing a global trend of growth. Investment Analyst at Absa Wealth & Investment, Chris Gilmour, recently unpacked the downgrade and the impact it would have for most South Africans.

Politics and economics will always be intertwined and, in Chris’ opinion, today they influence one another more than ever before. Though global trends may provide a general indication of how the political and economic situation of a country are connected, the individual background story of a country is far more important to understanding where it currently stands. South Africa’s current junk status may seem to align with political upheaval and uncertainty in other countries like The United States and Great Britain, however our downfall is mostly the fault of our own doing.

Looking to the immediate future, it’s important for South Africans to know that we are likely to experience another rating drop in the next few months, as South Africa’s local denominated debt is downgraded to sub-investment grade. This would start a domino effect of negative outcomes, with global funds being forced to divest from South Africa, higher debt servicing costs, a weaker rand and heightened inflation.  Depending on what happens politically, Chris estimates a very tough two to five-year economic period ahead for South Africa, which will no doubt be characterised by rising interest rates and bouts of recession.

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When asked what we can do to protect ourselves from this, Chris has some key pointers: ‘The first and most important thing that South Africans can do is to get out of the denial phase. If you have any debt, you should reduce this by as much as you possibly can – ideally, you should try and get rid of it completely. That’s not to say that you should sell the roof over your head, but slimming down by getting rid of anything superfluous will help to give you financial comfort over the coming years. This requires a lot of thought, but it’s incredibly important. Look at your entire monthly expenses, and split them into variable and fixed expenses. While you can’t do much about your fixed expenses (such as your bond etc.), your variable costs like entertainment and holidays can always be reduced. It requires discipline, but it can make a real difference.” Always remember, 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.

It’s not all darkness though – Chris believes that there is reason to see the light at the end of the tunnel for South Africa. Globally, this is a situation that he feels is remarkably similar to what happened in Brazil. “A few years ago, Moody’s downgraded Brazil two notches into junk status, within a few months of each other, during a time of significant political turmoil. Today, it’s looking like things may have stabilised, with the Brazilian real currently considered by many to be the world’s best-performing currency. There’s no reason why South Africa shouldn’t see a turnaround, too.”