The nasty impact of junk status downgrade
Consumers need to reduce their short-term debt as soon as possible and consolidate long-term debt
RATING agency Standard and Poor’s downgrade of South Africa to sub-investment status will negatively impact the housing market and consumers as a whole.
‘Homeowners with high debt levels should brace themselves for interest rate increases,’ warns Adrian Goslett, Regional Director and CEO of RE/MAX Southern Africa. ‘They need to reduce their short-term debt as soon as possible and consolidate long-term debt by increasing repayment installments to eat into the outstanding capital debt faster.’
What does the downgrade mean for the country? In simple terms, the cost of credit will increase.
‘Junk status means that it will cost more for the government to borrow money, which in turn will have a knock-on effect on the consumer.
‘Financial institutions will need to hold more money in reserve, which will make it more difficult to obtain credit, and the credit that is granted will come at a higher cost,’ Goslett explains.
‘A marginal mitigating factor is that to some degree financial institutions have already made provision and priced in the effects that a downgrade would have on credit costs.’
The increased cost of credit will dampen consumers’ desire to purchase large-ticket items such as property and motor vehicles. ‘Over the last while prospective home buyers have already been subjected to interest rate hikes, drought-driven food price inflation and rising electricity tariffs.
An increased cost of credit would be too much to bear for consumers who are already struggling to deal with the growing cost of living,’ says Goslett.
Foreign investment
The downgrade will also scare away foreign investment, as the country will be perceived as far too risky.
Government’s policy regarding foreign investment in land will further discourage investors. ‘If demand from foreign investors dwindles, the prices of assets will depreciate, along with the currency.
A fall in the rand will increase inflation and place pressure on interest rates, as well as the cost of imported goods. ‘The result of all of this is that the country will be in a ‘Catch 22’ situation, struggling to claw its way back out of junk status,’ said Goslett.
‘It is far easier to maintain an investment status than it is to improve the status once downgraded. The research conducted by Rand Merchant Bank reveals that on average it takes approximately seven to eight years for a country to recover from a downgrade.’
The downgrade will slow the economy further, which will impact the government’s ability to maintain and upgrade infrastructure.
The higher cost of credit will also slow the building sector as developers struggling to get the financial backing they require to initiate further projects. Goslett says that if there is an upside to the downgrade, it will be for consumers who have cash.
‘Investors with access to cash will be able to benefit from the predicted price stabilisation or decrease and will have more negotiating power in the market.
‘The tourism sector will also benefit from a weakening rand as travel to South Africa becomes cheaper for those with foreign currency,’ says Goslett.
He urges South African consumers to prepare themselves financially by reducing debt levels and putting away savings.
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