WHAT JUNK STATUS ACTUALLY MEANS
By now ‘ junk status’ is a term that we all know well. Even before the Standard and Poor’s downgrade, the threat of junk status hung over South Africa like a storm cloud. But what does this label now mean for South Africa, and how will it affect us. Here Old Mutual tells you what to expect and how best to prepare for it.
A country’s creditworthiness
A country’s sovereign credit rating doesn’t gauge economic health. It indicates a country’s creditworthiness. Just like us, the South African government sometimes has to borrow money. And like us, it’s assessed by lenders according to how much risk it poses. If a government is seen as likely to default on its payments, it will be charged a higher interest rate to offset the risk, and in some cases it may not even be able to secure credit. The rising cost of the government’s borrowing ultimately increases the cost of everything else and drives up inflation, while also sending negative signals to would-be investors.
Which factors affect a country’s credit rating?
There are various factors that can lead to junk status, but usually it’s not one factor but several that result in a downgrade. Factors such as the level of national debt, the level of government borrowing, the potential for economic growth, political stability, investor confidence and debt maturity only really can be taken as indicators when seen in context. In South Africa’s case it was political manouvering against the backdrop of instability in the mining sector, overall slow economic growth, and a weakened rand that resulted in the downgrade.
The effects of the ‘junk status’ label
One of the problems with the downgrade in ratings is that it increases the cost of government debt, which leaves the government with less money to put towards bettering the country (such as education, health, infrastructure, etc.). Ultimately, this will mean the government has to find other ways to make up the deficit, such as raising taxes. But the biggest way South Africans will feel the cost of junk status is in inflation. As the rand weakens further (a knock-on effect of junk status), the price of fuel will go up, which, in turn, will make everything else more expensive.
How to prepare for increased costs of living
For more useful money-related tips, sign up for the Old Mutual Money Mailer. In this free monthly newsletter, you’ll find articles on topics ranging from borrowing to saving and everything in between. If you’ve ever wanted to know how to save for university, how to choose a second hand car, or how to improve your credit score, the insights in these articles can leave you wiser, wealthier, and better equipped to make the most of your money.
Old Mutual offerings are made available through Old Mutual Finance (RF) (pty) Ltd, a Licensed Financial Services and Registered credit provider (NCRCP35).