For the first time in 17 years, South Africa's credit rating has been downgraded to "non-investment grade" or "junk" status by the ratings agencies S&P Global and Fitch. The third major rating agency, Moody’s, is yet to announce their revised credit rating for South Africa.
This financial downgrade will make it more expensive for South Africa to borrow money as lending to this country is now considered to be very risky. A bit like individuals with a poor credit rating who resort to borrowing from ‘loan sharks’, the SA government will now have to borrow from investors who are willing to invest in higher risk debt - this is expensive.
Putting this into perspective, for the period April 2015 to March 2016, the cost of interest on government debt was R128-billion or 3.2% of GDP (gross domestic product). The cost of borrowing is predicted to rise to around 4.25% of GDP, so that over 4% of GDP will be swallowed up by interest repayments - even before paying off the actual debt.
The government will have less money to spend on the services that really matter such as: grants‚ education, health, social grants and infrastructure. To cover the cost of more expensive borrowing, taxes are likely to increase in next year’s budget.
Other consequences of junk status:
Rising petrol prices
Higher transport costs
Increasing interest rates
Food prices will escalate
Economic growth and job creation will be detrimentally affected because investment decisions will be ‘put on ice’
Many local and foreign investment funds which invest pensions or savings into bonds (‘IOU’s) are forbidden from investing in countries with “junk” status, and will have to disinvest
International investors are likely to sell SA assets
Exporters and tourism are likely to benefit
All South Africans will feel the effects of this downgrade. It is likely to take many years of very hard work for the country to recover enough to regain investment grade status.