File image
Cape Town - Fears of a downgrading of South Africa’s foreign currency debt to junk status became a reality during last week. This decision was made by S&P's last Monday and on Friday Fitch followed.

Both rating agencies changed South Africa’s foreign currency debt ratings from a BBB- to a BB+ or subinvestment grade, having a devastating effect on the rand exchange rate, banking share prices and bond rates during last week.

The rand exchange rate now has lost 12.2 percent against the dollar since the day President Zuma recalled Pravin Gordhan from his investment road show on Monday, March 27.

Given the strong possibility that the weaker rand, higher inflation and interest rate expectations would weaken the financial sector, banking shares were sold at a big scale during last week.

Read also: Fitch follows S&P, downgrades SA

The Banking index lost 13.6 percent since the opening of the JSE on March 27.

Bond rates also suffered since the March 24. The R186 bond rate had increased from 8.37 percent to above 9.1 percent last week. This is an increase of 10 percent, meaning that the government now will have to pay 10 percent more to service its long-term debt.

Dr Chris Harmse is chief economist at Rebalance Fund Managers.