The decision by ratings agency Moody’s not to downgrade South Africa’s sovereign credit rating to junk but to rather place the country “on review” is good news, but should not be seen as a long-term reprieve, because the agency’s negative outlook signals there may well be a downgrade to junk status next year.
The downgrade to “junk” status by S&P Global Ratings is less welcome, because this means some investment-grade funds will no longer be able to buy government bonds as their rules state at least two of the three ratings agencies have to rate South Africa’s bonds at one notch above junk status.
Neil Roets, chief executive of Debt Rescue, one of the largest debt counselling companies in the country, said it was evident the agencies did not want to rock the boat too much before the ANC’s elective conference in December, but that “the writing was on the wall” for President Jacob Zuma and his cronies.
“This is merely a reprieve and it should not be seen as a sign that the ratings agencies are in any way more positive about South Africa’s economic prospects.
“With a growth rate of well below 1%, it is one of the worst performing emerging market economies in the world, and consumers are paying a hefty price for this slowdown.
“More than half of all South Africans are three months or more behind in their debt repayments, collectively owing some R1.71 trillion in debt (latest National Credit Regulator stats), and almost a third of all workers are sitting idle at home because there are no jobs available.”
Roets said consumers should brace themselves for hard times ahead and face the fact that all South Africans were going to be collectively punished for the government’s inability to grow the economy and create prosperity for all the country’s people.
Roets said unless something “spectacular” happened, it was highly likely that Moody’s would also downgrade the country’s foreign and locally denominated bond status to junk early next year.
“This will lead to an almost immediate sell-off of bonds valued at almost R100 million, leading to higher interest rates and an even further slowdown in the economy.”
“There is a strong likelihood of an interest rate hike early next year, which will increase the cost of borrowed money to consumers.
“This is not the time to go on spending sprees. We knew that the Moody’s downgrade was not going to stop consumers from digging deep to spend on Black Friday bargains and that was unfortunate.
“For the past several years we have seen the impact that Black Friday and Christmas shopping sprees have had on consumers when they approached us to try to get them out from under the financial mess that reckless holiday spending caused.”
Roets warned that January was the month of “the big reckoning”, when the chickens came home to roost.
“In the credit industry January is known as the longest month of the year, because many wage earners are paid early in December and many also get a 13th cheque.
“This creates a sudden sense of well-being and even before the advent of Black Friday that led to reckless spending.
“In January, when pay cheques are only paid in at the end of the month, suddenly Christmas spending is reflected on credit cards and store cards.
“This is also the time when school fees and other unexpected expenses become due.
“This is the time when we see the greatest increase of debt distressed consumers knocking on our doors for assistance in getting out from under their massive debt loads.
“Fortunately the debt review process offers hope, in that it allows them to repay their debts in smaller amounts over a longer period and sometimes even at a discount.”
Pieterse is chief consultant with Mediaservices