Junk status broken down
So you recently heard that South Africa’s credit rating has been rated junk. This downgrade has caused a great stir and a bit of worry. A lot of us don’t understand what it actually means, so let’s break it down a bit for you in normal language.
The junk status could in the longer term lead to higher interest rates‚ making it harder for families to pay for vehicles and their home loans. The main thing though about a downgrade is that it would bring an increase in the risk premium‚ meaning lenders increase interest rates because of a perceived greater risk. In other words the amount of interest charged on loans increases.
The result is households with capital in investments and assets are going to be mostly affected. This downgrade will lead to lower access to credit, so it will be harder to borrow money for that dream house you want and‚ potentially‚ an interest rate increase‚ which would affect many South Africans because they would be paying more to borrow money, yikes!
Higher interest rates increase the cost of families paying for loans from banks‚ financing things like home loans and vehicle finance payments. On top of all of this, the rand could decrease even further than it already has, causing a rise in the price of imported goods. It would also mean that international investors who want to buy bonds would be less inclined to buy South African government bonds because we are a higher risk for them financially.
This will further impact small businesses because they already struggle to keep customers, but this will make it even harder because people are more reluctant to pay a higher price to smaller businesses than they are for companies that have made a big name for themselves.
Lastly lower economic growth will also reduce investment and employment. This will make finding jobs even harder than it already is now. This is not good news for recent graduates and people that are looking for employment.
In summary it’s about to be lit if South Africa cannot pull itself out of this one and prove to investors that we are a country worth investing in. This is, however, one rating, and there is still a chance for redemption.
Here is a diagram below from the Treasury to explain it even further:
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