What a further downgrade means

A possible implication of the downgrades is higher taxes. DOS AND DON’TS

A possible implication is higher taxes, so take full advantage of available tax breaks, expert says.

Last week, Fitch left its rating unchanged with a stable outlook; Moody’s left its rating unchanged but with a negative outlook and S&P downgraded both the local and foreign currency ratings.

The key for South Africans now is not to dwell on this. A ratings agency downgrade is an assessment of our creditworthiness as a country. While it impacts the cost of government borrowing and the ability to continue servicing existing debt, the downgrade itself isn’t the issue.

Rather, we should focus on the underlying problem – our financial affairs as a country aren’t in good shape.

It’s not simple to predict the impact of these downgrades. The short-term impact is sometimes quite different to the medium-term.

Because downgrades relate to our ability to repay our debt, bond markets are always impacted; this affects the rand. Bank shares are often impacted due to the potential impact on interest rates.

However, trying to react to events like this by switching or making changes to one’s investments isn’t advised. Rather stay focused on the long-term objectives.

Spreading your investments across different types of assets will protect your savings from large fluctuations and hopefully allow you to ride out volatility and any short-term dips in values.

Diversification ensures exposure to growth assets like equities and property, not only conservative assets. These investments offer protection against inflation, especially longer term.

Global bond indices

Unfortunately we’re now a step closer to a removal of our bonds from the Citi World Government Bond Index.

As it requires both Moody’s and S&P to rate our local currency debt as junk, all it takes is a onenotch downgrade by Moody’s.

This could lead to potentially large outflows from SA bonds (up to R140 billion) as index-tracking funds are forced to liquidate holdings of SA government bonds.

However, remember that other global investors (those seeking higher yields among the countries that are sub-investment grade), are likely to be buyers of our rerated bonds so the net impact will be less significant.

The rand may also be impacted as global investors allocate less money to SA assets and government debt grows.

However, offshore investments will benefit. Hence it’s important to allocate money to offshore investments, too.

You can save more in a shortterm, liquid investment that you can access in emergencies; cut back on non-essential expenses; pay off debt and don’t incur new debt.

A possible implication of the downgrades, compounded by the growing fiscal deficit facing government, is higher taxes. Take full advantage of available tax breaks.

You can invest in a tax-free savings account and/or contribute up to 27.5% of your salary towards a retirement fund.

Andrew Davison is at Old Mutual Corporate Consultants