What junk status means for South Africans

PHOTO_BUDGET_WEALTHY_250215

File: It is expected that wealthier South Africans will get taxed more on the money they make from selling their stocks, bonds and property.

JOHANNESBURG - Some analysts who have been exploring the long-term consequences of a credit downgrade for South Africa disagree with newly-appointed Finance Minister, Malusi Gigaba, that its effects will be minimal on ordinary citizens.
 

Sygnia Group representative, Magda Wierzycka explained: “There is a credit rating downgrade where basically the debt of the bonds issued by the government are rated as riskier than they were yesterday.

"It means that investors both domestic and foreign will require more in terms of interest.

"It means the government will have less money to spend on basic services and yet our government has committed to a lot of basic services provision especially to the poor, which means in all likelihood taxes will go up; that means that inflation will go up. Interest rates aren't going to come down, so you'll continue to pay more on your credit card debt and car loans than you would have if we had a stable economy ”

READ: Moody's pushes back SA credit rating decision

A downgrade to junk would increase South Africa's debt-servicing costs, seen at R144-billion in the 2016/17 fiscal year.

Paying higher debt costs would mean less money for critical services such as housing, education and sanitation, which could incite more protests that have rocked towns across the country.

 

 

"This sovereign downgrade will lead to a steep erosion of already poor levels of investor confidence," Cas Coovadia, head of the banking industry lobby group said.

"Negative investor confidence will directly undermine an economy already struggling to achieve the levels of growth needed to meaningfully create jobs or lift our population out of poverty."

Moody's also said on Tuesday that it was placing South Africa on review for downgrade, and that it would assess the likelihood of changes in key areas of financial and macroeconomic policymaking following Zuma's cabinet changes.

WATCH: Gigaba describes downgrade as a setback

The rand weakened as much as 1.9 percent before recovering to trade 1.2 percent lower at 13.8400 per dollar.

The Johannesburg Securities Exchange's banking index slumped as much as 4.2 percent, while the yield on the benchmark government bond due in 2026 rose 16 basis points to 9.140 percent.