Junk Status: The impact on consumers

Fitch Ratings agency (November 2017) downgraded South Africa’s long-term debt to junk status, with Standard & Poor doing the same the next day and Moody placing us on review for a downgrade. We know it’s bad news, but how bad is this for the ordinary consumer?

Although we will not feel the impact of the downgrade immediately, the experts agree that we can expect:

• Price increases,
• More expensive credit,
• Increased taxes,
• Pressure on service delivery and
• International funds withdrawing their money out of SA.

The downgrade indicates that rating agencies believe there is an increased risk that government will not repay its debts. The price of credit for the country increases and more expensive debt means less money for services like social grants.

The rules of international bond funds force them to withdraw their investments when a country is downgraded to junk status to shield their shareholders from excessive risk, leading to large amounts of money leaving the country. Pressure on the Rand will increase and imported goods, such as fuel, will cost more, making it necessary for businesses to cut jobs. In short, less people with money and less people paying taxes.

Price increases usually cause an increase in the inflation rate, forcing the SA Reserve Bank to increase interest rates, making credit more expensive. Consumers will be required to pay more tax to fund government’s increasing debt burden and fill the gap left by tax payers who are no longer employed. Without enough money to fund its debt repayments, government might have to cut social grants and other services for the poor.

The effects of the downgrade do not paint a pretty picture for South African consumers.

However, while government and politics are responsible for the downgrades, it is up to us to decide how we are going to survive. Saving and spending wisely will help us get through this downgrade.

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