After the recent Cabinet reshuffle, Standard & Poor Global has downgraded South Africa to junk status, a shocking disturbance for Johannesburg Stock Exchange’s CEO, Nicky Newton-King. EWN mentions that “It’s going to be harder and more expensive for government to borrow money and that there will be less money for government services.”
This imposes harsh threats on our economy whereby many businesses, shareholders and employees find themselves in a vulnerable position to the upcoming changes. Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa reflects on the risk this downgrade will pose on foreign investment. He mentions that “If demand from foreign investors dwindles, the prices of assets will depreciate, along with the currency. A fall in the rand will increase inflation and place pressure on interest rates, as well as the cost of imported goods.”
Recently appointed Finance Minister Malusi Gigaba has however attempted to reassure the nation by emphasising his capability of his new position and that the ‘policy orientation’ remains grounded despite the appointment of a different minister.
This has not been enough to create any reassurance for the public, who will resume their plan to take to the streets on Friday, 7 April 2017, in protest action.
So what lies ahead for us as South Africans?
Goslett outlines a few factors to take into consideration, such as the housing market facing a bleak turn of events. “Homeowners with high debt levels should brace themselves for interest rate increases. They will need to focus on reducing their short-term debt as soon as possible and consolidate long-term debt by increasing repayment installments to eat into the outstanding capital debt faster.”
He adds that more money will be reserved by financial institutions, affecting the increase of credit costs and in turn increasing the difficulty of individuals to obtain credit. Credit that is however granted will be done at an extensive cost. The desire to purchase ‘large-ticket items’ such as property and motor vehicles will be hindered through these credit costs. The inflation in food prices, interest rates and escalating electricity costs have impacted harshly on those individuals who already find themselves financially constrained.
Although there is not much light to be seen in this situation, consumers who possess funds will benefit most. “Investors with access to cash will be able to benefit from the predicted price stabilisation or decrease and will have more negotiating power in the market. The tourism sector will also benefit from a weakening rand as travel to South Africa becomes cheaper for those with foreign currency,” says Goslett.
Being downgraded to junk status makes the recovery process extremely difficult, as “research concluded by Rand Merchant Bank reveals that on average it takes approximately seven to eight years for a country to recover from a downgrade.” South Africans should now see this as the time to eliminate lavish spending, adopt saving techniques and debt management plans.