Its so shocking how fast things have deteriorated in South Africa just within ninety hours after President Jacob Zuma took a lone stance to put the nation’s economy at the edge by throwing out the finance minister and his deputy. This has now downgraded SA to junk status.
For the very first time in 17 years, Standard & Poor’s Global (S&P) on Monday, cut the South African government’s credit rating to junk status
The last time the rating agency had South Africa on sub-investment grade or junk status was before February 25 2000 – that day S&P gave the country its first investment-grade rating for the first time.
S&P Global reduced its rating for South Africa from BBB- to BB+ and maintain a negative outlook, which meant there was a risk of more downgrades.
Until now‚ the country was rated by S&P at “BBB-”‚ with a negative outlook‚ the lowest possible investment-grade rating and though like the President who months ago described the nation’s downgrade as “not a big deal”, South Africans are yet to understand the impact of this decision on the nation’s economy.
We would all agree that junk status has been an inevitability for South Africa for some time, as the country struggled with debt, high levels of unemployment, incredibly slow economic growth and political uncertainty under president Jacob Zuma’s tenure.
The news on Monday caused the rand to weaken to 13.74 to the US dollar, the local unit’s weakest level since January. The 10-year bond yield was also affected as it rose to 9.125%, its highest level since November 2016 and as largely predicted by experts, the rating agency blamed the deteriorated level of the nation’s economy .
The agency said the decision was taken on the back of political and institutional uncertainty, apparently referring to the cabinet reshuffle of last week.
“This has increased the likelihood that economic growth and fiscal outcomes could suffer. The rating action also reflects our view that contingent liabilities to the state, particularly in the energy sector, are on the rise, and that previous plans to improve the underlying financial position of Eskom may not be implemented in a comprehensive and timely manner,” a statement said.
“In our view, higher risks of budgetary slippage will also put upward pressure on South Africa’s cost of capital, further dampening already-modest growth,” the group said.
Hence, looking at the current state of the nation reminds us of the event in 1985 where citizens experienced high costs from currency depreciation and adverse political developments.
Jannie Rossouw, Head of School of Economic & Business Sciences, University of the Witwatersrand said current SA situation reminiscent of events during the apartheid era when the country faced increasing international sanctions and isolation, while the exchange rate of the rand remained under severe pressure, recording sharp falls in the international value of the rand.
In that year, Rossouw recalled how the SA financial stability was put under severe pressure after the infamous Rubicon speech of then State President P W Botha where foreign banks refused to roll over South African short-term foreign debt, causing further depreciation of the exchange rate of the rand.
Now, history is about repeating itself as the country, since 2016, had been slowly tilting towards a total economic collapse.
The following events, according to her, reminiscent of developments then, could unfold:
- a continued depreciation of the rand, accelerated by the President’s inexplicable decision to remove his Finance Minister. The depreciation substantially increases the capital value of and interest repayments on foreign debt; and
- a downgrading of South Africa’s credit rating to junk status that results in credit lines being withdrawn by foreign funders such as banks.
“This time we can see trouble ahead and the government should act responsibly to avert a slow motion replay of 1985.” she said.
How SA Downgrade will Affect South Africans
Explaining further what South Africans should expect after S&P’s downgrade, the business expert said it would make export products become cheaper abroad while imported goods and services becomes more expensive.
More expensive imports put pressure on domestic inflation that can result in increases in interest rates. Currency depreciation also increases the capital value of foreign debt in domestic currency (where foreign debt are designated in foreign currency) and the interest burden on such debt, as interest is also paid in foreign currency, Rossouw explained.
Chris Malikane‚ an associate professor of Economics at Wits University also explained that the main thing a downgrade would bring‚ to the country is an increase in the risk premium‚ meaning lenders increase interest rates because of a perceived greater risk in default.
Households with capital in investments and assets are going to be mostly affected as their net worth will decrease.
“A ratings downgrade will lead to lower access to credit and‚ potentially‚ an interest rate increase‚ which would affect many South Africans because they would be paying more to borrow money.
“Higher interest rates increase the cost of families paying for loans from banks‚ financing things like home loans and vehicle finance payments” he said, adding that the rand could decrease further in value‚ causing a rise in the price of imported goods.
As it is, the South African banking shares, which lost more than R80bn of its value on Friday after President Jacob Zuma’s controversial cabinet reshuffle, has continued to decline on Monday though in a slower pace.
The top banking shares, which were all about 10% lower over the past seven days, all traded lower.
As other rating agencies like Moody’s are set to announce their South African ratings in the coming weeks, the rand, which as at now, has not depreciated as much as many economists have thought, is likely to be greatly affected in the nearest months if the country’s situation persist.
Rossouw said the South African government should introduce in a timely fashion policies to avert a repetition on the events of 1985.