THE EF­FECTS OF A DOWNGRADE

Finweek English Edition - - COVER STORY - By Lameez Omar­jee

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

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