The reality of the downgrade

2017-04-27 06:02

WE have been downgraded to junk status because there is serious doubt about the country’s ability to meet its financial obligations to lenders/investors. The factors that contributed to this are the political and fiscal mayhem and the negative economic outlook. Foreign investors are turning away from us as an investment destination because their confidence has been shattered by the recent Cabinet reshuffle and the firing of the incorruptible Finance minister and his deputy. Junk is not held but discarded and that is the attitude of investors towards us right now.The economy has contracted in the last quarter by -0,3% against a forecast of 0,6%. Unemployment is at almost 27%. Nkosazana Dlamini-Zuma exclaimed very loudly on national TV: “Forward radical economic transformation, forward”. Against this background, I cannot fathom how this is going to be achieved. Foreign investment is crucial to the development and growth of our economy. On the other hand, the ANCYL president said that he “welcomes the downgrade”, while Water and Sanitation Minister Nomvula Mokonyane said: “The rand can fall, we will pick it up”. Such unintelligible and impudent statements should be “sanitised” .Ratings agencies are accepted worldwide as a guide to making investment decisions.

The rand is now (at the time of writing) at R13,42 to the dollar and is bound to weaken further. It is at current levels not because of rand strength but a weaker dollar given the tensions between the U.S. and North Korea. There has been a huge fall off in the value of major banks’ shares to the combined value of R80 billion already.

Pension funds will not go unscathed and will bear a sizeable portion of this loss. The country is now faced with a bigger debt-servicing burden and there will be less money for areas such as social grants, health and infrastructure development. The price of imported goods and fuel will increase, leading to higher inflation and higher interest rates. As a result, bond payments will increase, putting more pressure on already struggling households.

There will be less disposable income to spend on other essential items.Recession is imminent. There will be large-scale closures of businesses, massive unemployment, reduced income for SARS by way of tax, VAT and excise duty. Whether there will be enough to continue paying the burgeoning social grant recipients is doubtful. This is the reality of the downgrade.


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