South Africa’s Debt Downgrade

There seems to be little that can stop the momentum which is propelling South Africa towards the lowest credit rating possible on the international markets.  The latest setback involves S&P (Standard and Poor) reported by the BBC (use a VPN for access) who have downgraded the country’s credit rating to junk status after the finance minister was dismissed suddenly.

The global ratings department of S&P brought South Africa’s sovereign debt rating down because it considered the sacking of the respected finance minister, Pravin Gordhan a risk to the implementation of the country’s fiscal policy.

Needless to say this had a negative effect on the markets as the Rand plummeted by nearly 2% against the dollar while the value of Government bonds dropped sharply too.   The depreciation fall was the worse in nearly two years and came in response to the sacking of the finance minister and also other cabinet members.

The credit rating is important to all countries as it has a serious effect on the interest rates the country pays when borrowing on the international markets.   It has surprised many that the President risked this turmoil when he knew that the agency was going to be announcing an assessment on his country’s prospects.

The country has not reached the ‘junk’ status that most countries fear but currently are only two points above that rating.  However there is a real possibility that the other major agencies will similarly cut their ratings too for the country.  If South Africa does end up with ‘junk’ ratings there will be profound effects for the economy as a whole.  Many pension and investment funds for example will automatically sell their bonds if they reach this status which will cause further pressure on their value.  This will mean that the government’s borrowing costs will rise sharply which as they are running a large deficit will be substantial.

This is not the first of the emerging economies to suffer such a downgrade, Russia and Brazil both were downgraded to junk status in 2015 due to their struggling economies.   It will certainly add to the pressure on President Zuma and you can see on the local TV broadcasts that this is rising substantially.  You may need to use a good vpn service like this to access some of the African only broadcasts on local Television channels.

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