HOW THE DOWNGRADE WILL AFFECT YOU

The downgrade of South African bonds to noninvestment-grade status will mean an increase in the cost of credit for the government. The downgrade has already triggered a devaluation of the rand. The value of the rand, the inflation rate and the prevailing interest rates in the country are inextricably linked.

A devaluation of the rand tends to fuel inflation, because our imports rise in price, and this in turn puts pressure on the Reserve Bank to increase interest rates.

Chris Gilmour, an investment analyst at Absa Wealth & Investment Management, says interest rates will most likely rise, thus increasing the monthly cost of things like home loan and vehicle finance repayments. “We may also find that the rand loses further ground against international currencies, which would increase the price we pay to import foreign goods into South Africa.” The cost of credit is likely to rise by two to three percent. “Being downgraded to junk status means we could conceivably – over time – be paying two to three percent more to service debt,” Gilmour says.

While we can expect interest rates to increase, we shouldn’t expect “proportionally linked” pay increases, Gilmour says. This will severely compromise the average consumer’s ability to repay debt. “It’s going to mean the consumer will be under relentless pressure, particularly those who are already over-indebted.” If you’re heavily in debt, speak to your creditors sooner rather than later to see what plans can be put in place to assist you, he advises.

If you are over-indebted, which is when you are unable to meet all of your credit payments on a monthly basis, you should consider debt review. Once you are in debt review, you enjoy legal protection from creditors should they seek to obtain judgment against you, or try to attach any of your assets. But in debt review, you have no further access to credit until all of your debts (except your home loan) have been repaid.