It has happened!
For months we, as a nation, have been struggling and fighting not to be downgraded to junk status, but on Monday, 3 April 2017, following the cabinet reshuffle, it was announced that South Africa’s sovereign credit rating was cut. However, what does that mean?
What does it mean?
According to Peter Olyott, Indwe Risk Services CEO, “in layman’s terms, it means that South Africa is losing more money than what it’s bringing in and that our credit rating is low. Hence, investors will look elsewhere as they won’t be able to get a big enough return on their South African investments.”
This also means, Olyott continues, that certain investment companies will be barred from holding our debt, as the financial risk will be too high and it can lead to South Africa defaulting on debt.
“Again, to put this simply, if you buy a couch on credit and you default on your payments because the interest on your loan is too high, you risk losing the couch.”
Rand value will decrease
Regarding our economy, because investors stop investing their money in the country, our asset prices will drop. Moreover, as the desire for our debt and JSE listed shares will weaken, the rand value will decrease, and inflation will rise. “Ultimately, the everyday South African citizen will have to face higher prices for goods and higher interest rates,” says Olyott.
People will face dire choices concerning their financial well-being and lifestyles. It is inevitable that certain cuts within the household will have to be made, but it’s of the utmost importance to reflect carefully on what you decide to cut.
“Speak to your insurance advisor, before you cancel your insurance coverage. In the short-term, it might look like a suitable solution. However, if you consider the costs involved in a car accident (not only to your vehicle but also to the other vehicles involved), replacing goods stolen from your home and rebuilding damaged structures, insurance is an absolute necessity. Hence, in the long-term, insurance can keep you from tumbling deeper down the debt hole,” says Olyott.
Rand Merchant Bank conducted research that shows it takes about seven years to recover from a junk status downgrade. “It’s important not to lose hope; review your budget, practise smarter spending, and wherever possible avoid increasing your debt,” concludes Olyott.