HOW junk AF­FECTS YOU

Al­though we won’t feel the down­grade straight away, it will catch up with us and our al­most empty pock­ets

CityPress - - Front Page - MAYA FISHER-FRENCH news@city­press.co.za

You won’t im­me­di­ately feel South Africa’s down­grade to “junk” sta­tus, but there will be a slow de­cay that will eat into our day-to-day stan­dard of liv­ing. What a down­grade in ef­fect means is that the risk that gov­ern­ment will de­fault on its debt re­pay­ments has in­creased.

This is sim­i­lar to the credit rat­ing you have with a credit bu­reau. If, as an in­di­vid­ual, your credit record is bad, it be­comes more dif­fi­cult to get a loan and, when that credit is is­sued, you will have to pay a higher in­ter­est rate.

In the same way, when gov­ern­ment tries to bor­row, less money will be avail­able and the amount of in­ter­est charged will be higher. This means that the amount of money go­ing to meet debt re­pay­ments will in­crease, leav­ing less money to spend on pri­or­i­ties such as education, health­care and hous­ing.

Be­fore the credit down­grade, former fi­nance min­is­ter Pravin Gord­han’s budget in Fe­bru­ary es­ti­mated that gov­ern­ment would spend R169 bil­lion on debt re­pay­ments this year – in­creas­ing at a rate of 10.5% each year. This is money that could, for ex­am­ple, be spent on help­ing poor uni­ver­sity stu­dents.

The bad news is that in­vestors sold the cur­rency as the rand de­val­u­ated, and this will af­fect us more quickly.

In­vestors, fear­ing that South Africa’s eco­nomic growth rate would slow, sold out of the JSE as well as gov­ern­ment bonds. This re­sult­ing fall in the value of shares and bonds will af­fect how much our pen­sion funds are worth, which are pri­mar­ily in­vested in equities and bonds.

A weaker rand will also have an ef­fect on the cost of petrol and im­ported food – this will take about six months to a year to be felt. How­ever long it takes to kick in, be sure that all South Africans will be pay­ing more for trans­port and food, put­ting fur­ther pressure on our house­hold fi­nances.

If these price in­creases feed through to a gen­er­ally higher in­fla­tion rate, the SA Re­serve Bank may be forced to in­crease in­ter­est rates, which would in­crease our per­sonal rate of bor­row­ing – this means that we would be spend­ing more money on ser­vic­ing debts such as our mort­gages and car fi­nance, leav­ing less money for our day-to-day expenses.

While higher in­ter­est rates will af­fect mid­dle class South Africans the most be­cause they have the high­est lev­els of debt rel­a­tive to in­come, this will also have a knock-on ef­fect on low-in­come earn­ers and the un­em­ployed, who rely on their mid­dle class fam­ily mem­bers for fi­nan­cial sup­port. As the mid­dle class will be forced to spend more money on food, trans­port and in­ter­est, there will be less money avail­able for peo­ple to help their ex­tended fam­i­lies.

The one hope we do have is that our gov­ern­ment will do enough in the next few months to avoid fur­ther down­grades, and hope­fully re­verse the S&P Global and Fitch down­grade de­ci­sions be­fore the neg­a­tive ef­fects start to hurt our pock­ets.

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