You won’t immediately feel South Africa’s downgrade to “junk” status, but there will be a slow decay that will eat into our day-to-day standard of living.
What a downgrade in effect means, is that the risk that government will default on its debt repayments has increased.
This is similar to the credit rating you have with a credit bureau. If, as an individual, your credit record is bad, it becomes more difficult to get a loan and, when that credit is issued, you will have to pay a higher interest rate.
Before the credit downgrade, former finance minister Pravin Gordhan’s budget in February estimated that government would spend R169bn on debt repayments this year – increasing at a rate of 10.5% each year. This is money that could, for example, be spent on helping poor university students.
The bad news is, that investors sold the currency as the rand devaluated, and this will affect us quickly.
Investors, fearing that South Africa’s economic growth rate would slow, sold out of the JSE as well as government bonds. This resulting fall in the value of shares and bonds will affect how much our pension funds are worth, which are primarily invested in equities and bonds.
A weaker rand will also have an effect on the cost of petrol and imported food – this will take about six months to a year to be felt. However long it takes to kick in, be sure that all South Africans will be paying more for transport and food, putting further pressure on our household finances.
If these price increases feed through to a generally higher inflation rate, the SA Reserve Bank may be forced to increase interest rates, which would increase our personal rate of borrowing. This means that we would be spending more money on servicing debts such as our mortgages and car finance, leaving less money for our day-to-day expenses.
Higher interest rates will affect middle class South Africans the most, because they have the highest levels of debt relative to income. However, it will also have a knock-on effect on low-income earners and the unemployed, who rely on their middle class family members for financial support. As the middle class will be forced to spend more money on food, transport and interest, there will be less money available for people to help their extended families.
The one hope we do have is that our government will do enough in the next few months to avoid further downgrades and hopefully reverse the S&P Global and Fitch downgrade decisions before the negative effects start to hurt our pockets.