How bad is the downgrade, really?
JOBURG – If you don't realise the extent of the credit rating agency's downgrade, an economy and business expert explains
If your personal credit score is quite low, this probably means that banks and other financial providers are less likely to lend you money with a low-interest rate and you could end up paying a lot more for your debt because of your presumed shifty actions.
This is what Wits University’s Professor Jannie Rossouw, head of the school of economic and business sciences agrees resembles what the South African credit rating downgrade to junk status actually means.
“Money is borrowed by the South African Government and companies at certain interest rates. Now, [after the downgrade] government needs to raise more money to pay higher rates. Taxes and inflation will go up and the Rand will depreciate,” he said.
Rossouw believes that this move by the rating agency, Standard and Poor’s, was fuelled by President Jacob Zuma’s recall of former Finance Minister Pravin Gordhan and resulted in what he termed the Zuma premium.
“It will affect everyone. In short, South Africans will pay higher taxes,” he said.
Why ratings from agencies like Standard and Poor’s matters, Rossouw explained, is that their opinion counts among international investors who are given a sense of how risky it is to invest in a country.
The downgrade reflects that the recent political instability put South Africa on the riskier side of investing.
Expand your budget and pay off your debt, Rossouw advised. Petrol prices will increase because interest rates and inflation will increase over time.
“This is going to play out over time. This is a slow motion accident, not sudden death.”
The accident was anticipated, Rossouw agreed, after the unexpected move by Zuma in December 2015 in which he axed Nhlanhla Nene, leaving the rand in turmoil.
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