When Politics trumps Economics
South Africa is officially downgraded to non-investment grade, also known as, the unjust Junk status after much speculation since the beginning of 2016.
So why the downgrade?
Amid last week’s shock to the country, when the South African President Jacob Zuma decided in his personal capacity to reshuffle his minister cabinet. One of the causalities was the respected former finance Minister Pravin Gordhan and his deputy who were apparently unfulfilling their cabinet roles as South African finance ministers.
It would take only a weekend for the aftermath of the axing of Pravin to take full effect! Standard & Poor (S&P), one of the three rating agencies held an emergency meeting over the weekend to discuss the South African economic outlook and political instability. They decided that enough was enough, they had huffed and puffed and warned the country enough that we had better get our act together or else. Well looks like they kept their word, citing the downgrade to the recent cabinet reshuffle.
The Downgrade spells huge trouble for a country estimated to have a 1% percent growth for 2017, and which contracted by -0.3% at the end of the 4th quarter in 2016.
With fears of increased interest rates, job losses, higher food prices, higher servicing of debt and decreased investment coming into the country, little is known on the real impact the downgrade will have on the economy. So to see the potential disaster junk status might provide for South Africa; we’ll look at our South American BRICs counterpart as an example. Brazil was downgraded in 2016 during South Africa’s annual budget speech, much was feared that it was an indicator that South Africa would be next in the coming months, yet we somehow avoided that scenario.
From Brazil with love
- Increased in sharp capital cost – Banking costs have gone up sharply over the past two years
- Reduced on foreign investment, mainly institutions that are traded in the international finance markets. They are withdrawing their investment plans in Brazil.
- Before the downgrade, unemployment was bordering on 4%, now the overall unemployment rate is about 7.5% and going up. Youth unemployment between 18 – 24 years of age reaching above 14-15%
One major issue is that Brazil’s debt was in local currency. Similarly, South Africa’s debt is in local currencies too. However, the majority of it is foreign owned, resulting in higher debt repayments. What this means is that, whenever the government needs money, they provide government bonds to investors, these bonds are relatively safe, (considering that should a government need to pay off their debt they simply print more money). The implications of this is that foreign investors purchases these bonds, although they are in South African Rands, the interest that is added is higher than our own because of they are owned by foreigners and the downgrade.
What this means for you and I?
You are probably reading this and my previous blog and you’re thinking, “This won’t really affect me now will it?” Well I’m sorry to say, but it will. It might not be directly yet, it will in the medium to long run.
Should all rating agencies decide to downgrade us, we will find ourselves with the Reserve Bank forced to increase interest rates. The increase of interest rates will have a severe impact on homeowners and potential homeowners who have unfixed mortgage rates. This is true for car owners as well and those with any other form of credit debt. Here’s your thinking, “So, I don’t have any of these”, true, but I’m sure you know someone who does. Imagine your family losing their car or their house because they are unable to pay off their “assets”. Imagine having to add an extra R20 000 in interest to your already massive student loan. Do not forget those looking for employment in a job-shedding environment. All of a sudden, it becomes too real.
We feel the indirect implications of an increase in interest rates through less capital spending on infrastructure and socio-economic programmes. Looking at the energy sector as a prime example, due to its primary linkage to other sectors, electrical and water infrastructure projects which were in the pipeline for development would become more expensive to fund, it is in this that government would require to find ways of raising money for these projects. That is where you and I come into play; we will experience a higher electricity and water rate than before, resulting in even less disposable income for consumers alike.
For an in-depth explanation of credit ratings and what they mean, our history with credit ratings and most importantly its impact on all of us click on the link below. https://thabisomofulatsi.wordpress.com/2016/05/09/junk-status-what-junk-status/
The idea of a rating downgrade is one we can only completely speculate. However, the reality is that things will change for many of us. Thank God, that he remains faithful, even through the storm. The truth is that we will come out of it. For all those who think a protest, or a simple share and like on social media will solve everything. We are way past that. We need God and we need him now.
2 Chronicles 7:14 if my people, who are called by my name, will humble themselves and pray and seek my face and turn from their wicked ways, then I will hear from heaven, and I will forgive their sin and will heal their land
Published by Thabiso Mofulatsi