How downgrade will affect us

HERE is what a ratings downgrade means for all of us:

In simple terms‚ if South Africa were a person with an income‚ debt obligations and a budget to manage repayment of that debt‚ our salary is going down while the cost of our debt is rising.

What South Africa makes from exports of commodities has been slashed by a weak global economy that just does not want to buy our raw materials.

This means the government is not making as much in taxes because economic activity is low‚ and it still has to spend in many areas.

These include infrastructure development‚ the public sector wage bill and other obligations that keep the country ticking over.

Moody’s expects economic growth will slow to a paltry 0.5% this year – nowhere near what we need to continue servicing debts.

Our sovereign or national debt mainly takes the form of government bonds‚ which is a form of borrowing where the government promises to pay the lender an interest rate to make the exchange appealing for the investor.

The problem is that‚ with the country’s income so dented by the global economy‚ government policy uncertainty in some sectors‚ strained labour relations affecting productivity and its huge wage bill‚ we have to borrow more and more.

This is the edge of the cliff – if South Africa gets downgraded to junk status‚ which would be the next notch down‚ some global investment companies like pension funds and asset managers would be precluded from holding our debt because they have rules about risk levels.

Junk status effectively means a country becomes a risk in terms of defaulting on its debt because it might not have enough money to pay back what it has borrowed and the interest it has promised to pay the holders of its debt.

It is a vicious cycle. If we get  downgraded‚ investors will begin to avoid South Africa and the prices of our assets will drop because of the lack of demand for our debt and shares listed on the JSE.

Also, the rand will weaken further‚ inflation will shoot up and the average South African will have to endure higher costs for goods and higher interest rates.

According to research by Rand Merchant Bank‚ it takes about 7½ years for a country to recover from a drop to junk status.

Those would be hard years of low growth in South Africa’s economy.

Finance Minister Pravin Gordhan’s budget held promise for the government’s plans to rein in spending and increase its ability to pay off its debt while borrowing less over the medium term.

The problem is, though, that the country has been sliding into a difficult situation for some years and it will not be a quick fix.

A likely downgrade to junk status is already reflecting in the interest amounts we have to pay to sovereign bond holders‚ with 40% of those bond holders foreigners who bought using strong currencies.

A continuously weakening rand will make it ever more difficult to continue repaying that debt at a manageable rate.

Overall, we may not be able to beat the junk downgrade in the near future‚ but we might be able to bounce back quickly with a consistent commitment to reducing the gap between what we earn and what we borrow.

Hopefully, a turnaround in the prices of the commodities we produce will contribute‚ but that will require the global economy to work in our favour – and that does not look promising in the short term.