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Once you go junk, you can’t escape the funk

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Moody’s, Fitch, Standard & Poor’s… Why are four of the Seven Dwarfs spamming South Africans’ newsfeeds?

Beginning 8 March, South Africa’s credit rating was put under review by Moody’s Investor Services rating agency, which on 6 May affirmed the country’s rating at Baa2 for long-term government bonds – two notches above sub-investment or junk status.

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While it is positive that Moody’s did not downgrade the country’s credit rating, the agency did change its outlook for South Africa to negative. With two of the major rating agencies still set to review South Africa’s credit rating, experts are calling on South African consumers to adjust their spending and get rid of short term debt.

Pending the outcome of reviews by Standard & Poor’s and Fitch, South Africa’s status may be downgraded to junk status by these rating agencies. This would have a negative impact on consumers and the country’s property market as a whole, according to Adrian Goslett, regional director and CEO of RE/Max South Africa.

Downgrades to junk status could severely impact on foreign investment which could lead to further depreciation of the rand. Currency deprecation will cause inflationary pressure which in turn will negatively impact economic growth, making it near impossible for the country to improve its status from junk should it be downgraded now.

As Goslett points out, low economic growth furthermore impacts negatively on South Africa’s ability to invest in pressing bulk infrastructure needs. Should junk status materialise for South Africa the consumer is likely to be faced with further increases in electricity cost in addition to high interest rates and a depreciating currency. All of this will impact on the demand for credit on items such as vehicles and homes.

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According to a 2015 South African Human Rights Commission report more than half of the country’s credit-active consumers are debt-stressed – classified as being two or more months in arrears. That is to say that more than 11m of the approximately 19m credit users (or 58%) in South Africa are over-indebted.

Consumers need to reign in their finances to counter-act these pressures on their personal finances. According to Ester Ochse, channel head at FNB Financial Advisory, the dramatically increasing cost of living likely surprised many consumers. “At the moment there is no indication that consumers will receive financial reprieve any time soon,” cautions Ochse. ‘’In fact, most financial indicators point to an even tougher outlook.”

This year, to date, consumers have had to adjust their budgets and financial resolutions to factor in back-to-back interest rate hikes, followed by fuel increases and SA energy regulator, Nersa,  granting Eskom a 9.4% electricity price hike for 2016/17. Meanwhile, the impact of the drought on the country’s food prices is only now beginning to take effect, with the National Meat Producers’ Organisation predicting red meat retail price increases of up to 30%.

The cherry on this grotesque cupcake is the approved increase in the National Credit Act (NCA) administration fees which took effect on 6 May. In 2005 the NCA approved initiation costs as well as a monthly administration fee of R57. This somewhat hidden monthly expense will now increase to R68,40. Every credit agreement will therefore cost a consumer R11,40 more per month to maintain.

Taking the bull by the horns

Taking the bull by the horns

Considering the increasing pressure on every consumer’s budget as well as the negative impacts that could ensue should a junk status rating materialise, and to help them prepare Goslett urges consumers to reduce their debt levels and increase their savings.

Ochse agrees that a change in consumer behaviour is required. She says consumers must be realistic about what they can achieve financially considering the current facts, ‘needs’ and ‘wants’ must be differentiated and consumers should set clear long-term versus short-term goals. Needs must be matched to available financial resources while progress is tracked. Ochse believes that timelines must be set to achieve each financial goal.

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“Once you’ve set yourself targets, try to avoid impulsive decisions that could delay the realisation of your resolutions,” says Ochse. “People need to be willing to sacrifice and compromise along the way.”

It can be hard to stick to financial goals and monthly budgets without accountability. Consumers should consider setting debit orders for savings so that it is viewed as a monthly expense instead of nice-to-have if there is money left over at the end of the month. Any extra income should be used to decrease short-term debt. It is always wise to look at the interest charged on each short-term debt account and then to first pay off the one with the highest interest rate if possible.


Mariette Steynberg is a qualified economist with a post-graduate diploma in financial planning. She has enjoyed working on holistic financial plans for clients in various stages of life, as well as a development economist assessing the socioeconomic impacts of new developments. When she is not working, Mariette enjoys parenting her quirky, delightful toddler girl. Cloth diapering, Eskimo kisses and the importance of reading to your child are all causes close to her heart. Mariette is passionate about financial education and hopes to use the experience she has gained to share knowledge with HomeTimes’ readership. Her goal is to provide information that is implementable by everyone.

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