South Africa has been downgraded to junk status by a rating agency. So what is a rating agency and what does a junk status mean?
There are economic and political implications and interpretations to this. I will just focus on what it means economically from this point onwards.
The actual rating has been set to double B plus. This can be translated to junk status. It is not the worst status as South Africa can be further downgraded to CCC/CC/C then D. All these are junk status status with the Cs being highest risk and D being default. This would mean that South Africa has no capacity to pay back any monies owed. As it is now, South Africa has been removed from the investment grades. Before the downgrade, they were considered medium risk.
So what does the downgrade mean for ordinary people? There will be no immediate impact to ordinary South Africans. In the coming months however, ordinary South Africans will see less money invested for services such as education and health and social services. The government may decide to tax the citizens more to cover up for the deficit in external investments. Electricity prices will go up. When electricity prices go up, they push up the operating and production costs of any products and services which use electricity. That means groceries will go up, clothes and transport will also go up.
South Africa will experience negative investor confidence. The reputation of the South African business environment will take a knock. It will no longer be considered a safe and predictable investment environment. Investors will be worried about their return on investment (ROI). Therefore there will be less investments from international investors. That means less money for imports.
Moody’s may also downgrade South Africa credit rating in the next few weeks.
Fitch may also do the same. These are the other credit agencies which operate in South Africa to give investors an outlook of how their investments may perform.
The political climate is considered unstable. Jacob Zuma has changed his finance ministers many times in the last few years. His latest cabinet reshuffle seems to have triggered the Standard and Poor’s downgrade. He is perceived to have replaced a more able finance minister with one who lacks economic experience.
The South African economy has already slowed down just like other BRICS countries. It has experienced a 0.3% growth in 2016 compared to a previous 1.3% in 2015.
Analysts say the downgrade is akin to jumping from frying pan into the fire.
South Africa may be treated just like any other African country such as Zimbabwe and Uganda. Mugabe and Museveni are said to disregard institutional democracy. They have become the institutions and nothing seems to work unless they are consulted. Zuma has always seemed to be working to subvert the institutions of parliamentary democracy. He seems to get his way despite allegations of corruption. He may have neglected the economy to focus on the survival politics. There are rumours some of his closest allies in the ANC may turn against him.
South Africa will now access more expensive borrowing. South Africa may feel victimised by the downgrade but it is probably a wake-up call to change ways. There are arguments against this. Liberation war political parties are in perpetual war with the former colonisers. They take it personally when they feel they are losing on the economic front. They feel the west is out to personally get them out of power and replace them with someone who asks how high when asked to jump. Parliamentary democracies and western systems of governance have not been handled well by most African governments. They do not work well if the checks and balances are subverted and ignored. You can not end corruption if no-one gets arrested and pays for their criminal behaviour. In Zimbabwe, it takes a group of ZANUPF supporters to march against you in order for you to be fired as a government official but it’s mostly over political power infighting.
Parliamentary democracies and western systems of governance have not been handled well by most African governments. They do not work well if the checks and balances are subverted and ignored. You can not end corruption if no-one gets arrested and pays for their criminal behaviour. In Zimbabwe, it takes a group of ZANUPF supporters to march against you in order for you to be fired as a government official but it’s mostly over political power infighting.
South Africa is now perceived to be at greater risk of defaulting on their debt obligations. For individuals, home and car loans will be more expensive to pay back. The Rand might decrease in value. There will be a rise in price of imported goods. International investors will shun SA investment bonds as the downgrade effectively demotes it from an investment grade to non-investment grade or speculative. The 15% in foreign debt now is now in junk status. That money will now be difficult to pay back. The South African government will pay more interest on the same loans.
There will be a rise in petrol and food prices as petrol prices in United States Dollars. The Americans were very smart to fix the price of a barrel of oil to the USD. This gives the fiat USD a global demand as every country needs to buy petrol.
What can the South African government do? They can either cut spending or increase taxes on their workers to fund public goods and services. If the public goods and services start to receive less funding, then we will see the poor getting poorer as government can no longer afford to look after them. You can expect increased social unrest as time goes on. They only have to look to their northern neighbour Zimbabwe to predict what might happen.
My advice is for South Africans to realise that they need to put politics aside and work together as a people to map a way forward. It is not all doom and gloom if they come up with a plan to create capital right within South Africa. I am one of those people who are opposed to loans from the IMF and World Bank. I think African countries should have an exit strategy from the cycle of dependence. We should create our own capital. We should ask questions like who owns credit rating agencies and for what purpose? At the same time, if we subscribe to western standards, we should not cry foul just because the system is now holding us accountable.
To ordinary South africans and Africans in general I say please learn about and understand capital. Learn how we can create our own capital. Teach yourself to be financially literate because these things are not in school. Your brand is being tainted and you need to work together to maintain it.
I would also recommend the book ‘Confessions Of An Economic Hitman’ by John Perkins. You can also watch his videos on YouTube. This book will help you understand that the world is involved in perpetual economic and currency wars. What is happening to South Africa is not new. We are involved in games we need to fully understand to win. It is up to us to understand the rules and play to win as any country would.