The poor would suffer the most
ORDINARY people would be hardest hit if South Africa lost its investment-grade sovereign credit rating. The rating, a view on a country’s ability to repay its debt, has far-reaching economic consequences. A downgrade to sub-investment grade, or junk status, would affect poor people acutely. Here’s why:
The cost of living would increase. “A downgrade could weaken the rand, which would translate into imported inflation and prompt higher interest rates,” said KPMG economist Christie Viljoen.
A weak rand would increase “pass-through inflation” on imported goods, said Citadel chief strategist Adrian Saville. “Ordinary South Africans just have to look around their homes to see imported goods, such as smartphones. Many cars are imported, as is fuel.”
A number of local companies import raw materials to produce goods and services. A weak rand would increase the cost of raw materials, which would in turn increase the cost of production and make certain goods and services more expensive, as companies pass on these increases to consumers.
Aside from the immediate increase in the cost of living driven by a weak rand, the inflationary uplift would also, presumably, lead to higher interest rates, as the Reserve Bank tries to keep inflation in check. Higher interest rates make it more expensive to repay debt, such as vehicle and home loans.
Less government spending, higher taxes. Just as a bank charges you a higher interest rate on a loan if it deems you to be a high risk, so South Africa, if it loses its investment-grade credit rating, would be deemed a more risky borrower. Bond investors would charge the government a higher borrowing cost, which would increase the portion of the government budget spent on servicing debt. The government would then have less to spend on, for example, infrastructure and social grants.
“Another potential reaction from government, to improve its finances, would be to increase taxes, in order to replace the increased amount going towards debt servicing,” said Viljoen.
Higher government borrowing costs would spill over into higher interest rates, as this cost was passed on to consumers, said Saville.
If companies, whose credit ratings were generally capped at the level of the sovereign, also had to pay more for debt, consumers could feel it too, said Anthea Gardner, managing partner at Cartesian Capital. For example, retailers that had largely absorbed inflationary increases might not be able to continue doing so, Gardner said. This would increase the cost of basic goods.
Sluggish economic growth and job losses. A downgrade would put South Africa in a weaker economic grouping, Viljoen said. “There would be a bit of a black mark next to our name, which would have an impact on [foreign] investment and ultimately jobs.”
Countries were downgraded due to ineffective policies, said Saville. “The message . . . is that policies are not being effectively executed, which will be evident in slower economic growth and higher unemployment. That impacts every household.”