SA Junk Status : What does it mean?

The recent downgrading of South Africa’s credit rating to “Junk” status feels as though it’s darkened the mood of the entire country. This raised the question : how will this really affect the South African “man in the street”? Should Jan Pierewiet really be sinking into despair?

The consensus seems to be that Jan Pierewiet’s pocket will start feeling the pain in about six months, mainly because :

• The Rand will weaken, with the result that the cost of imported products will increase. This will affect the petrol price, imported groceries, motor spares, etc. – many things that we can’t do without, and for which we will therefore need to pay increased prices.
• It’s likely that that the Reserve Bank will increase the Repo Rate (mainly because of higher inflation due in part to the higher cost of imported goods), which means that the Prime Lending Rate will increase. Anyone who has outstanding debt on which the interest rate is linked to the Prime Lending Rate will experience an increase in their monthly instalment. This will apply to most Home Loans and Vehicle Finance agreements.

There will be those who feel the impact sooner, such as :

• People planning overseas trips, as foreign currency, airport taxes, etc. will be more expensive for anyone paying in South African Rands ;
• Businesses that rely on imported products, as the cost of their goods (and shipping) will increase, resulting in either their profits being reduced or their prices having to increase.

Unfortunately, this “Junk status” rating may not be as bad as it gets. Countries are rated on both their foreign currency and their local currency. One ratings agency (Standard & Poor) have downgraded our foreign currency, but both major ratings agencies (S&P and Moody) have not yet downgraded our local currency. Should South Africa’s local currency be downgraded, this will result in further interest rate increases (due to the funding costs for the banks going up), as well as increases in both inflation and lending rates.

As debt counsellors, the potential reduction in the average South African’s disposable income, combined with higher instalments on some debt repayments, makes it more important for people to be aware of the option of Debt Review. As the National Credit Act itself says, it makes provision for debt re-arrangement to assist anyone who is over-indebted, or who is experiencing difficulty in satisfying all of their obligations under credit agreements in a timely manner.
In short, the forecast may be gloomy, but at least there are still some rays of light.