SA debt costs set to increase further

A SOVEREIGN credit rating provides a relative ranking of a country’s overall creditworthiness. The lower the credit rating, the higher the credit risk and, therefore, the higher the interest rate that the borrower will have to pay in order to compensate the lender for the extra risk.

The rand is likely to weaken. The rules of many investment funds do not allow them to place money in a country with “junk status” so it is likely that investment funds will sell their South African bonds, resulting in the depreciation of the rand.

A weaker rand means higher fuel prices and higher prices for imported foods. South Africa, for example, imports large quantities of maize.

It could, however, be expected that a weaker rand benefits exports and tourism. But if the exported goods are reliant on imported inputs, then the benefit is offset.

Also due to the high crime and draconian visa regulations, tourists are discouraged from visiting this country.

South Africa’s debt service costs will increase further as investors demand higher interest rates due to higher risk. Higher interest rates are inevitably likely to affect the already highly indebted consumer as the Reserve Bank will raise interest rates. This could result in consumers being forced to make debt repayments that they cannot keep up with due to no fault of their own.

The affordability of their debt is based on current income, current expenses and current interest rates. So if interest rates go up their repayment on debt increases, putting consumers in a financial position they can no longer afford, resulting in possible repossession of hard-earned assets.

Dr Malcolm Figg, MP, Democratic Alliance spokesman for appropriations in the National Assembly