5 things you must know about SA's junk status

Johannesburg – Standard & Poor’s move to downgrade

the country has led to a selloff in bank shares and caused the rand to drop.

However, what else does SA’s position as a junk rated

country mean?

Investec has provided some pointers as to what effect

this may have:

l0 level1 lfo1">1.       S&P

could also relook SA’s local currency rating, which is still a notch above

junk. Local currency ratings indicate how willing and able SA is to meet all of

its financial obligations on a timely basis, regardless of whether it owes

money in rands or another currency.

l0 level1 lfo1">2.       The

downgrades will raise borrowing costs, undermine investor confidence, will likely reduce

the attractiveness of SA bonds at auction; and so negatively how easily SA

can borrow. This, in turn, will have a negative impact on SA’s government

finances, with government trying to trim how much money it owes and still spend

on infrastructure.

l0 level1 lfo1">3.       Higher

borrowing costs increase the cost of repaying government debt, and without a

substantial, and sustainable curtailment in government expenditure and

rise in revenue, increase the chance of further credit downgrades. Upwards

pressure is placed on interest rates (weaker economic growth) and rand weakness

(as investors lose confidence and sell SA portfolio assets) which exacerbates

the situation, reducing further governments capacity for expenditure, including

existing social welfare grants.

l0 level1 lfo1">4.       Pressure

will be placed on South Africa's cost of capital, the cash the country spends

on infrastructure projects, further dampening already-modest growth.”

l0 level1 lfo1">5.       S&P’s

downgrades occurred outside the scheduled country review calendar. Moody’s has

signalled it could also move sooner on a downgrade than its planned April 7. Fitch

tends to be aligned with S&P, and so could also provide a sub investment

country credit rating for South Africa this year.

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