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Junk Status and Your Wallet

South Africa is still reeling following a week of not one, but two credit rating downgrades to Junk Status. Financial experts believe the effects of the downgrades by both Fitch Ratings and Standard & Poor’s will be felt for years to come. So what should you, as a consumer, expect?

THE RATINGS EXPLAINED

Firstly, what are credit ratings agencies? Global economies are monitored by three major credit ratings agencies – Moody’s Investors Services, Standard & Poor’s and Fitch Ratings. Together, these three “rating giants” monitor and rate just over 95% of the world’s debt. While there are about 150 other ratings agencies, it’s these three agencies’ reports that matter most. These rating agencies look at a country’s ability to repay any debt by looking at various factors including a country’s political situation, the socio-political stability and overall economic situation.

WHY SOUTH AFRICA BORROWS MONEY

As with any country, money is needed to improve and expand infrastructure. Whether it’s the upgrading of power and water systems or the constructions of factories, the money needs to come from somewhere. Since South Africa doesn’t have enough savings needed to fund the infrastructure costs, government needs to borrow money from willing investors.

In order for South Africa to borrow money, we need a positive credit rating from the three major credit rating agencies. Without it, investors simply won’t feel confident enough to lend us any money.

THE ABCs

Credit rating agencies use a standard measuring scale to determine the current rating of a country. SA is currently rated as BB+ with a negative outlook by S&P’s and BB+ but stable by Fitch.

junk status

THE CONSUMER

So what does junk status mean to you, the buyer? This is how the recent downgrade could hit your pocket in coming months.

  • Overseas investors will withdraw their money from South Africa, fearing the markets could crash.
  • With less money coming into the country via foreign investments, government will have a harder time repaying debts. As a result, government would have to up interest rates.
  • Higher interest rates will result in every-day South Africans having to pay more on car payments, home loans, credit card debt and any other money owed.
  • Import products will become more expensive. This includes petrol, clothing, food and medicines.
  • Cost increases on local products will also be seen, while electricity tariffs will also be upped.
  • With fewer people willing to invest in South Africa, unemployment will rise as a result of likely factory closures and retrenchments.
  • Any long-term investments such as pension funds and other savings will decrease in value, leaving you with less.
  • The Rand will weaken considerably over time as investments dry up and it becomes more expensive to afford basic goods. And with overseas investors having less faith in the stability of the South African economy and government structures, the Rand will weaken even more.
  • Social grants will have to be cut to a minimum as government will no longer have enough money rolling in to cover social programmes.

A FEW EXAMPLES

Following the junk status downgrade by global ratings agency Standard & Poor’s, the National Treasury released info on what life could look like post-junk status, should interest rates increase by 50 basis points year-on-year. At this stage, no one can tell exactly how things will pan out.

Home Loans

R1-million home loan to be paid off over a 20-year period.

  • 5% (current interest rate) = R9 984 per month
  • 5% = R10 664 per month
  • 5% = R11 361 per month
  • 5% = R12 074 per month

Personal Loans

If you’re in need of some extra money to pay for any unforeseen events – medical costs, damage to property or buying your first car – it could become pricey as interest rates go up.

R50 000 personal loan to be paid off over a 5-year period.

  • 5% (current interest rate) = R1 075 per month
  • 5% = R1 100 per month
  • 5% = R1 125 per month
  • 5% = R1 150 per month

Car Loans

Whether you’re planning on buying your car now or later, the interest rates will have a negative impact on your monthly payments.

R400 000 car loan to be paid over a 5-year period.

  • 5% (current interest rate) = R8 598 per month
  • 5% = R8 797 per month
  • 5% = R8 999 per month
  • .5% = R9 204 per month

Credit Card Payments

You’ll have to cut back on shopping on credit in the coming months, as you’ll most likely pay more for those items bought.

A current credit card balance of R20 000 that rolls over each month.

  • 21% (current interest rate) = R350 per month
  • 22% = R367 per month
  • 23% = R383 per month
  • 24% = R400 per month

Sources: Econometrix, National Treasury, EWN