As rumours do the rounds that international ratings agency Moody’s could downgrade South Africa’s sovereign debt to junk status in the near future, economists have warned that would be the worst news for highly indebted local consumers this year.
The panic about a possible sub-investment grade came after Moody’s expressed concern over the vast sums of money needed to bail out state-owned entities (SOEs) and the lack of growth in the economy.
Finance Minister Tito Mboweni recently announced huge bailouts for South African Airways, the South African Broadcasting Corporation and Denel.
The minister said the money would be issued in “chunks”, accompanied by certain conditions, but some rating agencies were concerned the bailouts could impede economic growth.
Mboweni last week said Treasury took from the contingency reserve account to bail out the three entities reeling under the weight of near-bankruptcy. He further announced that each would have a chief restructuring officer who would implement turn-around strategies.
The hint of the downgrade began when Fitch, one of the “big three” credit rating agencies, kept SA’s long-term foreign and local currency debt on BB+, the first notch of sub-investment grade (or junk status).
The agency then downgraded SA’s outlook from stable to negative, citing concerns about the government’s financial support of Eskom and low economic growth.
Efficient Group chief economist Dawie Roodt said: “The moment the government and its state-owned entities have to pay more to borrow money both locally and internationally, it has no option other than to pass those increased borrowing costs on to the consumer.
“It is common cause that the South African Revenue Service is not meeting expectations in collecting taxes … so a number of options [exist] including increased taxes, an increase in the VAT rate and all manner of rates and levies to bail it out of the crisis.”
He said consumers would feel the bulk of the pain because government had already taxed corporates to the hilt and there was little room to manoeuvre with personal tax payers. The growing fiscal deficit was something that all the ratings agencies were looking at closely.
“The 5.5% to 6% deficit we are looking at is a serious problem.”
Roodt’s sentiments were echoed by Neil Roets, chief executive of counselling firm Debt Rescue, who said consumers were in for a very rough ride.
“The stark reality is that Eskom’s debt alone is enough to cause the government serious problems, let alone its outstanding debts of more than R2 trillion that have to be repaid. The state’s plans to cut jobs in the civil service have been unanimously shot down by the unions,” Roets said.
An in-house survey conducted by Debt Rescue recently found that 24.8% of consumers had gone into debt to pay for day-to-day expenses like food, transport and schooling. A whopping 43% said they spent 50% or more of their monthly income on debt.
“We are going to have to adapt our lifestyles to do more with less,” Roets said.