On 4 April this year, one of the world’s foremost ratings agencies, Standard & Poor’s, placed South Africa’s credit outlook at junk status.
We’ve all heard that this is bad news for South Africans, but understanding the ins and outs of junk status and what it means to everyday citizens can be complicated. That’s why we thought we’d break it down for you, so you know what to expect in the coming months and years.
The first step to understanding how junk status will affect you is to understand what this and other complex terms mean. Here are some of the basics:
Sovereign credit rating: This is a rating that the three internationally recognised ratings agencies give to a country. This rating tells investors how much risk is associated with investing in a country. The lower the rating, the riskier the country is considered to be, and the higher the rating, the better that country is for investors. Basically, it refers to our country’s ability and willingness to pay back its debt.
Junk status: This is a level of credit rating. The easiest way to understand it is to think of South Africa as if it’s a person. If a person doesn’t pay their debt, it becomes more difficult for that person to get credit in the future. Fewer lenders would be willing to give them credit, and those who do would charge higher interest rates. That is, essentially, the position that South Africa is in.
Mandate: A person who manages investment funds may be bound by certain rules that guide them on how and where those funds can be invested. This is known as a mandate, and many mandates allow fund managers to invest only in countries with a higher credit rating. So, when a country is downgraded to junk status, many investors are required to pull out funds from that country’s shares and bonds, even if they might not want to.
All of this sounds far-removed from the average South African. After all, what do foreign investors have to do with you? It’s already been a few months and nothing has really changed in your day-to-day life, has it?
Unfortunately, junk status affects us in the long-term. The prime lending rate is likely to go up in the coming months and years, which means that you will be paying even more on your car and your home repayments. The cost of food will also increase, as will petrol and transport.
Also, because the country will be spending more money than before on repaying our debt, there is less money left over to help those who really need it, so low-income families will also be in a worse-off position.
While many of these factors are beyond the ability of ordinary South Africans to change individually, there are ways that you can lessen the impact of junk status on yourself and your family. As the cost of living is expected to increase, it will be the small things that will help save you the most money. Here are a few tips to make your money stretch further:
If you’re looking to save money right away, get an affordable insurance quote from Budget, and you could start paying less on your insurance as soon as next month!