They have warned the cost of imported goods including electronics, food, petrol and basic services could rise soon - with the effect being felt as soon as next month.
Fitch Ratings agency was the first to downgrade South Africa’s to junk status earlier this year, with Standard & Poor’s following suit shortly after.
Moody’s has placed the country on review for a downgrade.
Sygnia Asset management chief executive Magda Wierzycka said while the first economic downgrade in February had been largely based on political instability caused by the firing of former finance minister Pravin Gordhan, the latest one was influenced by the rapid economic deterioration.
“Government has overspent on one hand in bailing out the state-owned enterprises including the SA Post office and SA Airways.
“On the other hand it has spent a lot on salary increases of public servants while on the revenue side it has collected less in taxes than it usually did.
The SA Revenue Service has deteriorated from being one of the finest institutions in the world,” she said.
Wierzycka said due to the high unemployment rate which had rocketed to 27%, most people could not pay taxes as well as spend on goods, thus the revenue base for government had shrunk.
She warned that foreign investors could also be reluctant to invest in “anything that’s junk”.
“From Monday we will see outflows from bond markets, interest rates will go up soon, which will mean the rand will depreciate further.
“When that happens everything we import such as electronics, transport costs and clothing will also increase. Unfortunately, the poor will be hit hard.”
She said retailers would adjust prices on goods, even on some existing stock, to compensate for the weak rand.
Those who had credit card debt and mortgage bonds would pay more in servicing the debt.
Wierzycka likened the downgrading to an earthquake, saying from tomorrow consumers would start feeling the “earth tremors” which were a precursor to a “tsunami”.
She said while Moody’s had decided to give the country the “benefit of the doubt” for a month to allow the government to get its house in order, the rating agency would be keenly following events at the ANC elective conference next month.
“Its future decision will depend on who is elected as a leader at the conference and whether they have the capacity to turn the economy around.
“At the moment, there’s no economic growth policy. And the fact that skeletons of corruption are falling out of the cupboard is not helping the country,” Wierzycka said.
Economist Ian Cruickshank also warned that financial markets “hate uncertainty” and warned that tough conditions were looming for everyone.
He said consumers should “take it easy” on spending for the next few months.
“This is not the right time to be spending on goods that could wait. Don’t spend more than you can afford,” Cruickshank advised.
He said the country was heading for “financial mishaps” and the cost of living would be higher.
Cruickshank said it was also expected that few businesses would expand or get started, thus affecting prospects of job creation.
Because South Africa had to borrow money to pay for large infrastructure projects, less would now be available to spend on roads, rails and harbours and other infrastructure, he added.
In response to the downgrades, the Treasury hinted at the effect the decisions would have on financial assistance for needy students, saying it was finalising a new financial model.
President Jacob Zuma had been expected to announce a funding model for universities following the release of a report by the fees commission earlier this month which stated that government could not afford to provide free education.
Tumisho Grater, economic strategist at Novare Actuaries and Consultants, said it was a black Friday after all as S&P Global downgraded South Africa’s long-term sovereign ratings by one notch, the foreign currency to BB and local currency to BB+ with a stable outlook.
“Effectively downgrading South Africa to full junk status, the decision by S&P mirrors concerns that South Africa’s low-growth trajectory may persist and that there may be further weakening of the government’s fiscal position."
Meanwhile, Moody’s has decided to hold fire as it placed the sovereign’s Baa3 foreign and local-currency ratings on review for a downgrade.
A decision from Moody’s is expected to follow the February 2018 Budget.
“S&P’s downgrade means that South Africa will now fall out of Barclays Global Aggregate Index, while outflows are anticipated. They are not likely to be as large as what may be expected should South Africa fall out of the Citi’s World Government Bond Index (which requires both Moody’s and S&P’s long-term local currency rating to be below investment grade before removing a country from the index).
“The slip in the credit ratings increases the calls for reforms even louder and falling deeper into the red (in the instance of Moody’s following suit) may lead to more aggressive falls in the rand, government bonds and business and consumer confidence, which is needed to attract investment, create jobs and grow the economy.
“Earlier this year, South Africa fell out of the JP Morgan Emerging Markets Index following the downgrades that occurred after the cabinet reshuffle. All credit ratings from the three agencies are required to be investment grade to remain in the index. But the hunt for yield didn’t suppress global investors’ appetite for SA bonds.
"However, a faster-than-expected pace of monetary policy tightening by global central banks poses a threat to these capital flows too.”