Counting seconds to junk status…
Junk status is on the cards for South Africa. As it stands, the economy has recently ‘slipped’ into temporary recession.
Kwatsaduza – Junk status is on the cards for South Africa. As it stands, the economy has recently ‘slipped’ into temporary recession.
Don’t ask me what that means but one thing I know for sure is that we are in the deep end for real.
It’s no secret that our economy has been experiencing poor economic growth and incurring lots of public debt.
What puzzles me is how ordinary citizens seem not to understand how this whole debacle is going to affect our daily lives.
Here is what I know about junk status and how it might affect the growth of our economy.
The ratings from these agencies have the power to influence investment as investors use credit rating assessments to determine whether they will invest their money in certain companies or countries.
In a country with high youth unemployment rate, we need all kinds of investment we can get our hands on.
I personally feel that government needs to prioritise economic growth and development, and for us to do that we need to attract investors. Unfortunately, with a bad credit rating we simply cannot do that.
In general, a credit rating signifies a country’s overall ability to provide a profitable investment environment. It reflects factors such as economic growth, levels of public debt, levels of investment flows and political stability.
A downgrade of South Africa to junk by Moody’s would imply that government bonds will be exited from the Citi World Government Bond Index, a major global index that tracks investment-grade debt.
Another effect of a credit rating downgrade is that the interest rates paid by government would go up, which will undoubtably have an effect on ordinary citizens because creditworthy consumers tend to get lower rates from banks which will not be the case with those who are already struggling.
With the downgrade, the government has to pay more in debt servicing costs, meaning that it will have less to spend on social initiatives and infrastructure.
In order to plug the funding gap, government will have to increase revenue through higher taxes.
With that said, we need to start preparing ourselves for the worst because whether we choose to distance ourselves or not, either way, we are all going to be affected.
Moody’s is set to release its report on South Africa’s economic status just before the end of March.
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