The downgrades of South African bonds to non-investment-grade status will mean an increase in the cost of credit for the government. The downgrade has already triggered a devaluation of the rand. The value of the rand, the inflation rate and the prevailing interest rates in the country are inextricably linked.
A devaluation of the rand tends to fuel inflation, because our imports rise in price, and this in turn puts pressure on the Reserve Bank to increase interest rates.
Chris Gilmour, an investment analyst at Absa Wealth & Investment Management, says interest rates will most likely rise, thus increasing the monthly cost of things like home loan and vehicle finance repayments. “We may also find that the rand loses further ground against international currencies, which would increase the price we pay to import foreign goods into South Africa.”
The cost of credit is likely to rise by two to three percent. “Being downgraded to junk status means we could conceivably – over time – be paying two to three percent more to service debt,” Gilmour says.
While we can expect interest rates to increase, we shouldn’t expect “proportionally linked” pay increases, Gilmour says. This will severely compromise the average consumer’s ability to repay debt. “It’s going to mean the consumer will be under relentless pressure, particularly those who are already over-indebted.” If you’re heavily in debt, speak to your creditors sooner rather than later to see what plans can be put in place to assist you, he advises.
If you are over-indebted, which is when you are unable to meet all of your credit payments on a monthly basis, you should consider debt review. Once you are in debt review, you enjoy legal protection from creditors should they seek to obtain judgment against you, or try to attach any of your assets. But in debt review, you have no further access to credit until all of your debts (except your home loan) have been repaid.
The increased cost of credit will dampen consumers’ desire to purchase large-ticket items such as property. In the recent past, prospective homebuyers have been subjected to interest rate hikes, drought-driven food-price inflation and rising electricity tariffs.
“An increased cost of credit would be too much to bear for consumers who are already struggling to deal with the growing cost of living,” says Adrian Goslett, the regional director and chief executive of RE/MAX of Southern Africa. The higher cost of credit will also slow the building sector, as developers will struggle to get the financial backing they require to initiate further projects.
Goslett’s advice to homeowners with high levels of debt: “Focus on reducing your short-term debt as soon as possible and consolidate your long-term debt by increasing your home loan repayments so that you pay off the outstanding capital debt faster.”
South Africa’s downgrade by Standard & Poor’s is bad news for the short-term insurance industry, Chief executive of the SA Insurance Association, Viviene Pearson says. “This means that the cost of motor parts, which are mostly imported, will increase exponentially, which is likely to lead to increased repair costs followed by increased premiums for policyholders over and above an already higher cost of living for consumers.
“Short-term insurance products could become less affordable, which exposes consumers to financial risks in the event of a loss of, or damage to, assets. Furthermore, motor-body repairers, the building industry and others will feel the pinch of potentially less work, leading to job losses,” she says.
Tempted to cancel your insurance?
As we face higher prices for goods and higher interest rates, we will face “dire choices” concerning our financial well-being and our lifestyles, Peter Olyott, the chief executive of Indwe Risk Services, warns.
While cutting back on household expenses is inevitable, Olyott says it is of the utmost importance to reflect carefully on what you decide to cut.
Before you cancel your short-term insurance, speak to an insurance adviser, he says. “In the short-term, it might look like a solution. However, if you consider the costs involved in a car accident, replacing goods stolen from your home and rebuilding damaged structures, insurance is an absolute necessity. In the long-term, insurance can keep you from tumbling deeper down the debt hole,” he says.
“It’s important not to lose hope. Review your budget, practise smarter spending, and wherever possible avoid increasing your debt.”