Standard & Poors has pulled the trigger to become the first ratings agency to downgrade South Africa and you can be sure the other ratings agencies will follow suit.
Everyone is concerned about the potentially devastating impact these downgrades could have.
To quote Investec this morning, “Unless the ANC takes decisive action today, the market will focus exclusively on the fact that S&P have cut us to junk status and comments from Moody’s and Fitch suggest they won’t be far behind.”
But what does a downgrade actually mean?
Well, it’s similar to you having a clothing account.
Generally, you buy goods on credit and pay it off over a period.
If you are unable to service this debt, your credit lines get cut and in a lot of cases you are blacklisted or become ‘junk’.
When you get blacklisted or regarded as junk, you can’t get credit from anyone until you become rehabilitated.
That’s kind of where we are now.
Standard & Poors has now told the world they think South Africa is no longer credit worthy.
Credit downgrades trash everything and everyone from interest rates to asset prices, wages, employment and cost of living and it takes a long time to get out of it …
What can we expect?
Sadly a downgrade will affect everyone, but it is the poorest, breadline citizens that will be hardest hit.
If you earn an income and debt obligations your salary will not keep up with the rising cost of your debt.
Unemployment is likely to rise which means that SARS will collect less tax revenues.
The currency will become ever weaker which makes the price of imports more expensive.
This makes the cost of goods and services more expensive.
This price inflation will hit everyone and ultimately, it is we, the consumer who suffers.
It becomes a vicious cycle from here – investors will avoid investing here.
This lack of demand will see our asset prices drop, including shares listed on our stock exchange.
From here rand weakness perpetuates the cycle again.
Higher cost of borrowing slows growth which affects jobs and hence, consumer spending.
As I mentioned in a previous article, it takes around seven to eight years for a country to recover from a downgrade.
If South Africa is no longer able to borrow to stimulate our economy, we are in for a long period of economic pain.
Protect your investments
If you have an investment or share portfolio, now is a good time to protect your local assets.
There are ways to protect yourself against further downside risk so there is no need for blind panic.
I do suggest seeking advice on the best protective strategy in the near term as I believe ratings Agencies Fitch and Moody’s will align their ratings with Standard & Poors.
You are welcome to mail me too at robp@unum.co.za if you need a hand.
Follow us on these platforms:
Like our Facebook page and follow us on Twitter.
For news straight to your phone invite us:
WhatsApp: 079 431 1217
Instagram: benonicitytimes.co.za
