The effects of the rand’s downgrade to junk status would take a while to affect the man in the street, a Pretoria economist has said.
“When ratings agency S&P Global downgraded the rand, the rating agency was only formalising what has been going on for some time,” said chief economist Dawie Roodt, of the Efficient Group.
Roodt said South Africa had been warned for some time that a downgrade was on its way.
“The markets expected a downgrade, which led to a surprisingly mooted reaction on the financial markets,” he said.
Roodt said the value of the rand, the bond market and growth of the economy would all remain suppressed.
A downgrade raises the cost of borrowing for a country.
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The downgrade made South Africa less attractive to investors.
Investors could withdraw money, or not invest in future, said Roodt.
The result would be weak economic growth and consequently higher rates of employment and poverty.
“A weaker currency is bad news,” he said.
“Depending on what happens next, the recent fall in the rand will add to inflationary pressures, weigh on economic growth, add to unemployment and poverty, and may eventually force the SA Reserve Bank to raise interest rates.”
Consumers could in time feel the financial pressure indirectly, via inflation, said Roodt.
Goods and services and petrol could cost more in future.
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“Grants will continue to be paid but grant income could in future buy less (for instance, if the price of bread went up),” he said.
“Inflation will make everything more expensive but grants would not necessarily increase to allow for inflation.”
Similarly, he did not think e-tolls would be affected by the ratings downgrade.
The infrastructure is already in place, so it is not likely to be affected by the higher borrowing costs.
Only if e-tolls were increased to keep up with inflation, would motorists be affected, said Roodt.
Ratings agency Moody’s did not follow S&P Global with a downgrading of the SA rand, as expected.
It announced on Tuesday that it would assess the situation in three months’ time.
Roodt said on the global stage the rand was actually undervalued.
“We have a massively undervalued currency, we have amazingly attractive yields on our bond market, we have fantastic companies to invest in. South Africa is a screaming buy.”
“Yet, despite all of this, we probably need at the very least two years to regain our investment status; probably five,” he said.
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