THE EFFECTS OF A DOWNGRADE
With regard to its economic condition, South Africa could be likened to an ill patient under high care at a hospital, according to Standard Bank’s chief economist
Goolam Ballim. The low energy levels and symptoms suffered by the “patient” are reflected in volatile stock markets, a high inflation rate and depreciating currency.
Speaking at a media briefing to discuss the implications should Standard & Poor’s downgrade SA’s credit rating to junk, Ballim said a rating agency’s judgment simply serves as reminder of the patient’s condition, which is already embedded in their identity. However, this label has the potential to shift the patient into intensive care.
S&P is set to announce its decision on SA’s credit rating on 3 June. S&P’s current rating of SA, of BBB- with a negative outlook, is the worst of all the ratings agencies, said Ballim, and there is a strong likelihood that the country will be downgraded.
Of the six countries – Brazil, Bulgaria, Croatia, Hungary, Romania and Russia – which have been downgraded in the past eight years, S&P has been the vanguard for five of them, he explained.
WHEN THE DOWNGRADE HAPPENS
Ultimately, said Ballim, financial markets “tend to convulse prior to a downgrade and the real economy smashes afterwards”. It is the impact on the real economy, where South Africans live, which must be considered. Sub-investment status will result in a recession for SA, according to Ballim. This means 200 000 jobs are at risk, he said, which will impact 600 000 dependents.
Established households with higher skilled individuals will cling to jobs. While their income is not at risk, they will suffer more “balance sheet shock” than “income shock”. Their savings, investments and wealth will be impaired as a result of higher interest rates. This may boost their level of debt, said Ballim.
The middle class, however, will suffer an income shock. Their buying power will be reduced as a result of job-loss risk.
Poorer households, often supported by blue-collar workers, will become more dependent on the state. Without much to lose on their balance sheet or incomes, they will be trapped or “locked in a poorer stable”, he said.
The politically connected will experience some level of wealth impairment and some level of balance sheet shock. The level of excess characterising their lifestyles may be somewhat reduced.
Goolam Ballim Chief economist at Standard Bank