Junk status a bruising blow to SA, says Iraj Abedian

Cape Town - South Africa has suffered a serious setback with downgrades from ratings agencies and it will take a punishing toll, particularly on the poor.

On Friday Fitch lowered both the foreign and local currencies of SA to sub-investment grade. This followed a downgrade by Standard & Poor (S&P) of South Africa's foreign debt. Moody’s responded by announcing a review pending downgrade of South Africa.  

"Fitch has gone one major step ahead of S&P and downgraded even the domestic debt rating of the SA government," economist Iraj Abedian told Fin24.

A damning picture

He said this is pretty damning of the prospects for the country’s fiscal management. "Both global and domestic borrowing will now be so much more expensive for the government of South Africa," Abedian explained.
 
"In the face of rising expectations from the government due to the introduction of 'radical economic transformation', this downgrade will seriously constrain the National Treasury’s options."

Fitch, S&P and Moody’s have all highlighted the possibility of the government weakening its resolve to fiscal consolidation and implementing policies to address the country’s economic and social problems

Even if we take the ratings agencies out of the picture, all South Africans should be concerned about the country's economic health, Dr Kenneth Creamer, economist from Wits University, told Fin24.

"Financial indiscipline will ultimately result in reduced service delivery to poor communities," he said.

"The most vulnerable South Africans, such as those who rely completely on government's delivery of public health and public education services, will suffer the most."

Trail of devastation

The Banking Association of South Africa (BASA) said although the downgrades were largely expected, it is still devastating.

"This additional (Fitch) downgrade is of greater concern as it includes a downgrade of the rand, after the local-currency rating was also lowered one level to junk," said BASA MD Cass Coovadia in a statement.

"This will have an immediate and severe impact on the currency, will seriously impact on our ability to attract foreign investment and will likely trigger a marked steep rise in prices of goods and services across the board."

Rising inflation

The Consumer Goods Council of South Africa (CGCSA) in a statement the downgrades could also result in the distinct prospect of rising inflation and prices, which will affect consumers who are already struggling to balance household budgets.

"In turn, this will reduce spending and directly impact on our members’ businesses,” said CGCSA co-chairperson Gareth Ackerman.

He said the CGCSA hopes the government will demonstrate more willingness to not only engage with the business sector, but importantly consider suggestions from organised business to deal with the country’s economic crisis.

“Our members, who between them contribute over R508bn to GDP, are ready and willing to partner with the government to drive economic growth. But this can only be achieved in an environment of mutual trust, respect and transparency,” said Ackerman.

Hindering economic growth

Research manager at Euromonitor, Thomas Verryn, reiterated that economic growth is likely to be impacted negatively.

"The cost of government debt will increase, which will lead to more money being spent on servicing public debt, rather than providing essential services and infrastructure development."

He cautioned that the downgrade could also lead to disinvestment, which and will make South Africa less attractive for future investment.

"Consumers, especially low and middle income, will also feel the impact, with a decrease in disposable income as inflation and interest rates are likely to increase. Possible job losses are also on the cards as the cost of doing business increases and companies shed jobs to cut costs."

Verryn said the manner in which the government handles the downgrade will determine South Africa’s economic future.

"The impact of the downgrade will plague South Africa for some time, with uncertainty the only certainty."

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