What are the implications of a `junk status` downgrade?
The downgrade of SA’s sovereign credit rating to junk status after the Zuma administration’s midnight Cabinet reshuffle on 31 March has plunged the country into anxiety and depression. The rand and government bonds fell sharply after the S&P and now Fitch agencies took the step in a reaction to what they see as risks to fiscal policy and political uncertainty. But what does the downgrade mean for financial executives and South Africans in general?
Volatility is likely to increase in local financial markets and in the political arena. The South African Reserve Bank will be keeping a close eye on market developments to see if the impending sell-off creates chaos and threatens the stability of the financial system.
A weaker rand - some experts feel it could go as low as R17 to the dollar - will drive an increased inflation rate, which in turn will cause spiraling food and petrol prices. The South African consumer will come under pressure and access to credit will be limited, which is bad for business.
Many local and foreign investment funds are barred from pouring funds into investment jurisdictions with junk status because of the perceived risks. Christie Viljoen senior economist at KPMG South Africa said this will mean that many will sell their debt, and as much as $10 billion, according to Reuters, could leave South Africa.
In his 2016 Budget speech, former finance minister Pravin Gordhan highlighted over 90 integrated land development projects, valued at more than R130 billion, that are in progress to reshape cities in partnership with the private sector. However, with government certain to try to slash its debt in the wake of the downgrade, pressure will be placed on South Africa's cost of capital, the cash the country spends on infrastructure projects, further dampening modest growth.
Assuming capital flight and currency depreciation, imported goods will become more expensive and the natural counterbalance of buffeting the export industry will not be as effective because of government's reduced spending ability and support of the manufacturing sector.