JUNK STATUS – what it means to you
Debt management expert, Wikus Olivier explains what you need to know.
Junk status – the term everyone uses, but few understand.
Also see: Eskom’s dying glimmer
Summarising an Oxford Dictionary explanation, a country with junk status is regarded as being insecure in its finances, and is not expected to deliver on repayments.
South Africa is threatening to fall into this bracket.
Wikus Olivier, the Debt Management Expert of DebtSafe, explained what our pending junk status downgrade could mean.
“There are three international ratings agencies: Fitch, Standard & Poor and Moody’s Investment Services. These agencies monitor countries’ Gross Domestic Product (GDP), budget and bank account insufficiencies, to evaluate if the country’s economy is worthy of credit and investment.”
The devaluating Rand, instability in the mining sector, political turmoil and recent tertiary institution protests have resulted in a bad evaluation of South Africa.
What will happen when a downgrade is announced?
When downgraded, it will cost our Government more to borrow money in global capital markets, combined with a current budgetary shortfall.
In other words, South Africa is spending more than it earns, and will continue borrowing.
“The problem is these international loans are charged at a higher interest rate for junk status countries – a cost passed onto the public to carry, in the form of higher reposession rates.”
The immediate effect of this will be an increased tax rate and a higher cost of bonds.
“The Government’s deby will end up costing more and more, and the only way to pay it off is to increase its ‘earnings’ via taxes in various forms. Junk status will inevitably bring about tougher financial times.”
Thank you to Liza du Plessis of DebtSafe for sharing this information and photograph.
