On Monday evening, Standard & Poor’s (S&P) sent shock waves through South Africa when it downgraded the country’s foreign currency rating to BB+ – officially sub-investment grade – while local currency debt has been downgraded to BBB- (one notch above junk).
Both ratings carry a negative outlook, meaning further downgrades may lie ahead.
Hours after, ratings agency Moody’s confirmed that it would also be placing the country on review for downgrade.
Moody’s currently has its South African rating at Baa2, two notches above junk. This means that should it too announce a downgrade rating, it will not necessarily mean junk status for South Africa.
Junk status has a number of dire consequences for both the country, and its people. It affects future investment, currency, interest rates, and employment, among other things.
What is even more concerning is that economists note that more than not, countries that are downgraded generally fall into recession, and South Africa is likely to follow that trend as it is currently not geared towards sustainable growth.
According to Absa, interest rates are likely rise, thus increasing the monthly cost on things like homeloan and vehicle finance repayments. The rand is also likely to lose further ground against international currencies, which would increase the price that we pay to import foreign goods.
Treasury said in a statement on Monday evening (3 April) that while the leadership of the finance portfolio has changed, with Treasury now under the helm of Malusi Gigaba, government’s overall policy orientation remains the same.
“This rating announcement calls for South Africans to reflect on the need to sustain and act with urgency to accelerate inclusive growth and development so that we can reverse the triple challenge of poverty, unemployment and inequality.
“Reducing reliance on foreign savings to fund investment and relying less on debt to finance public expenditure will secure South Africa’s fiscal sovereignty and economic independence,” the Treasury said.
The government department published two infographics better explaining how credit ratings work, and what junk status means for ordinary South Africans.
Impact of junk status on an ordinary South African
How credit ratings work
Minister Gigaba is set to brief the media on Tuesday to provide a ‘comprehensive report’ on announcement by the two ratings agencies.