Cape Town – South Africans who are planning to retire within the next 20 years will have to work longer, following the country’s recent sovereign credit ratings downgrade to junk status, said Dawie de Villiers, CEO at Sanlam Employee Benefits.
Standard & Poor’s (S&P) Global Ratings and Fitch Ratings both cut South Africa’s ratings to sub-investment grade last week, following President Jacob Zuma’s midnight Cabinet reshuffle on March 31.
“The ratings downgrades are unchartered territory,” De Villiers told Fin24. “South Africa won’t snap out of it immediately. My guess is that it will take at least five to seven years (before the country will return to investment grade and it’s going to have an impact on an entire generation of people.”
A sub-investment grade sovereign credit rating will dampen economic growth in South Africa, which in turn directly affects job creation, growth in per capita income and the ability of consumers to keep up with inflation.
READ: Downgrade: Where to now?
“If you take employees – companies that employ people will have less access to growth opportunities and capital. Some will have to retrench people and those who keep their jobs will most likely have to work for lower remuneration.
“This means employees will save less towards their retirement, as many will rather opt to take home more money. From a retirement savings perspective this is very bad news,” De Villiers said.
People who lose their jobs on the other hand will in all likelihood opt to cash out their retirement savings to be able to make a living, he added.
The effect of financial hardship
De Villiers pointed out that when people are in financial hardship they tend to be more stressed which leads to an increase in illnesses and disabilities. This in turn will have a bearing on the claims cycle of business that provide employee benefits.
“If claims increase by, say 30%, it will mean the cost of risk cover, such as death and disability will also go up. Healthy people will therefore have to pay more for this type of cover.”
A junk rating also means that investment on the long term will either decrease, or investors, especially foreigners, will withdraw from South Africa if it doesn’t make financial sense any longer to invest in the country.
The outflow of funds will have an adverse effect on equities in bonds, which in turn will have a bearing on companies. “As pension funds invest money in companies to achieve growth, the lower yields will have a dampening effect on retirement benefits,” De Villiers said.Read Fin24's top stories trending on Twitter: Fin24’s top stories