Junk status will boost inflation
Downgrade can reduce consumers’ disposable income
ARATINGS downgrade to “junk status” by agencies could spell bad news for South African consumers, say experts. Clif Johnston, vice-chairman of the South African National Consumer Union (Sancu) said while South Africa was still waiting for the Standard and Poor’s (S&P) rating, the outcomes so far from Moody’s and Fitch were encouraging for consumers.
“A downgrade to ‘junk status’ will inevitably lead to higher interest rates locally which will reduce the disposable income of consumers, the majority of whom rely on credit to some extent. The rand exchange rate will also be affected negatively under such a scenario, leading to increased prices of imported goods in the short term and increased prices overall in the longer term.”
Johnston said the chance of a downgrade from S&P was now lower in the light of the other two ratings, and the impact of such a downgrade, should it occur, would be lessened.
“Consumers leave the credit ratings prognosis to the financial experts, but we remain concerned. We shall only see light at the end of the tunnel when there is a ratings improvement, at least in the outlook from ‘negative’ to ‘stable’.”
Neil Roets, chief executive of Debt Rescue, said it would have been very bad news for consumers if ratings agencies Fitch and Moody’s had downgraded South Africa’s debt to junk status.
“The effect would have been immediate because more than 30percent of government debt is held by foreign investors and many would have sold off their bonds and left South Africa. The rest would have demanded higher interest rates on their investments.”
Roets said this would have filtered through to the economy through the Reserve Bank who would have been compelled to increase the repo rate which then would have affected prices of everything from food to services.
“It is hugely important for consumers that government creates a stable environment for the business community to operate in. If remedial action is not taken soon, we may well not be so fortunate next time round when the ratings agencies put South Africa’s economy under the loop.”
Novare’s economic strategist, Tumisho Grater, said Fitch was the first of the three agencies to act, and fired a final warning shot by revising the outlook on South Africa’s outlook to negative from stable, while maintaining the long-term foreign and local currency issuer at BBB, the lowest investment grade level.
“Fitch emphasised political risks to standards of governance and policy making have increased and will remain elevated until the electoral conference of the ANC in December next year. This increased political risk is likely to compromise the country’s macroeconomic performance. Therefore, a continuation of political instability, among other factors, may result in a downgrade in future.”
Rian le Roux, Old Mutual Investment Group chief economist, said the decision by Moody’s on Friday to leave South Africa’s sovereign credit rating unchanged at two notches above junk status was another welcome reprieve, providing an extended window to rebuild confidence in the country and improve its economic prospects before the next ratings reviews next year.
Le Roux said South Africa could be subjected to multiple downgrades and such an outcome could cause capital flight, a slump in the rand’s value, an inflation surge and would leave the Reserve Bank with no choice but to raise interest rates.
“As agencies typically first change the outlook, before actually changing the rating, the negative ratings from all three agencies imply the urgency has increased for South Africa to get its economic and fiscal house in order. The implication is that South Africa will need to work harder to implement structural reforms to restore confidence and encourage investment.”