How Is The “Junk” Status Rating Going To Affect Your Pocket?
Recently due to (among other factors involving Eskom) some sudden political manoeuvring, the various international ratings agencies downgraded SA’s Sovereign debt and credit rating to “Junk” Status. This basically means that based on their expertise, the ratings agencies don’t feel SA will honour it’s debt obligations in the future and would not be a good place for foreign investment.
How Does This Affect Me?
Though surprisingly resilient, the Rand took a knock when the announcements were made. It dipped in value compared to other currencies like the US Dollar and Euro. This was to be expected. What this means is that companies and consumers buying items that are brought into the country will immediately begin paying more to import things. That means those reselling those items will need to push up their costs here to maintain profit margins. When those prices go up so to will other prices as consumers need to try to earn a little more to cover the increased costs.
‘the Rand took a knock when the announcements were made. It dipped in value compared to other currencies’
Now, prices going up due to inflation is normal and can be pretty consistent. Each year, government (and hopefully each of us consumers) plan for that. However, what this quick drop against other currencies will do is create a sudden jump in prices that will ripple out across the economy like when a stone is dropped into a pond. That will hit consumers in the pocket as they end up paying more for everyday items.
Less foreign investment is a bad thing. We like companies and people from other countries spending their money here so that those living in SA can use the cash inflow to go shopping and buy stuff. Less investment means less jobs, which means less money flowing in the economy.
Interest Rates Will Climb
Another inevitable outcome is that interest rates will climb. This means that over time those paying for credit each month will have to pay a bit more. Some economists even anticipate as much as a 3% increase over time. Though it seems small that affects every credit agreement consumers have. The stats show that most consumers are already struggling to repay their debts. Increased monthly instalments might be too much for many pushing them to start defaulting on their loans.
‘those paying for credit each month will have to pay a bit more’
Short Term Insurance Costs Will Climb
Since many parts for cars come in from overseas the costs of repairs for vehicles will go up. That means that insurance companies are going to have to pay more for repairs to cars involved in accidents and claims. Guess who will end up carrying the cost? Everyone who is insured as the insurers try to cover the risk.
The Rand May Devalue Further
As the Rand loses value, so people may move from the Rand to other currencies and as investment lessens, so too does the economic outlook of the country. All of this can feed on itself and create a kind of downwards spiral for the currency.
‘look to your own finances and make sure you are ready for tough times ahead’
What Can You Do?
There is little that an individual consumer can do with their individual spending power to turn the entire economic situation of the country around by themselves but you can look to your own finances and make sure you are ready for tough times ahead. If you never budget, now would be a good time to start doing so. If you make use of credit you will want to anticipate paying more each month for that same credit and adjust accordingly. If you are already at the stretching point then you should think about going to see a professional about your situation. Debt Counsellors can offer excellent budgeting advice and also discuss how debt review might help a consumer (if they qualify). Even those already under debt review should prepare for tough times ahead and start to once again tighten their belts (in some cases you may need to make a new hole).