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What downgrade means

By Owen S Nkomo | 2017-04-11 12:20:58.0

The recent downgrade by Fitch and S&P has had many people concerned and confused at the same time.

The decision followed the dismissal of several ministers and their deputies by President Jacob Zuma.

Of all the dismissals, the ministry of finance was the one cited as being most sensitive and highly questionable by most investment managers and ratings agencies alike.

The merits of the reshuffle remain highly topical, but in this article I focus on how the downgrades will directly impact you, the reader, and what it means in the long run.

The downgrades in question relate to South Africa's total debt being only 10% foreign currency denominated.

This is the portion of debt that has been downgraded due to political instability and the risk of perceived policy shifts at the department of finance and national Treasury.

So it is not all debt that has been downgraded.

We should, by all means, avoid a total debt downgrade because this would worsen things for us.

At this stage, chances of this happening are very limited and we should still be able to meet our loan repayments.

How does the downgrade affect you?

Interest rates may rise.

This is obviously negative for consumers who have loans, since they could see their bond costs go up, their credit card costs increase and their car loans also start to cost more.

This will leave them with little money to use on important elements of their lives.

Getting loans from banks will be harder - due to higher risks associated with our markets.

Banks may tighten or make it hard to get a loan that two months ago may have been achieved easily.

It will also be hard for South African banks to do overseas deals for capital investments, and with costs rising across the banking system, the banks will have no choice but to increase their fees to us.

Fuel and food prices could increase.

South Africa imports a lot of food and energy products, both these make up the highest portion when we calculate inflation.

If they both increase due to input costs, then we will pay more for food and fuel.

The oil price is also going up and could see us pay R14 per litre for fuel.

Unemployment will remain high. This is the biggest concern because the fewer people employed, the larger the number of people dependent on the employed.

The country should always be pushing to deliver opportunities to increase employment, not the opposite.

So now the environment of unstable politics and policy uncertainty will likely force business people to hold back on some projects that would have seen people hired.

Retrenchments and the freezing of new posts will be a reality as well.

So please use your money wisely, should you be retrenched.

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