24 Apr How South Africa’s Credit Rating Downgrade Affects You

All that junk: what South Africa’s credit rating downgrade means for expats abroad

On Monday 3 April South Africans were left reeling for the third time in one week following the announcement that Standard & Poor’s has downgraded South Africa to junk status. This is a major blow following the loss of political stalwart and public opponent of Zuma’s presidential antics, Ahmed Kathrada, as well as the reshuffling of South Africa’s cabinet the week. 

What’s the big deal with credit ratings?

Until a few years ago South Africans were widely oblivious about credit ratings, not necessarily because they’d never impacted the South African economy (we’d witnessed it back in 2000) , but because information is far more readily available and publicly discussed nowadays. Nevertheless, many people still struggle to understand the impact credit ratings on a country and its citizens. So, what’s the fuss about?

What are credit ratings?

They say no man is an island, and the same can be said for countries – even if you do live on an island. As countries trade with and invest in other countries, analysts make decisions about a country’s likelihood, capacity and speed of such country to “return the favour” to determine which countries are best to invest in. Essentially, money which is invested needs to yield results for investors, and money which is borrowed needs to be repaid with interest within a certain timeframe.

Economists and analysts consider many factors when determining a country’s credit rating, including its political stability, natural resources, production and productivity, industriousness, infrastructure, workforce, locality as well as past and present economic performance. The key indicator which has pushed for South Africa’s downgrade is undoubtedly our “Susceptibility to Event”, an indicator which assesses our political risk, socioeconomic risk, external vulnerability risk and institutional independence.

Investors and international financial institutions use these ratings as guidelines to determine whether to invest in or assist a country (or corporation) with financial aid and it also affects trade agreements between different countries, financial institutions or corporations as well as the economic growth within a country.

Who are the major credit rating agencies and how do their ratings work?

There are four major credit ratings agencies recognised by the major banks and jurisdictions worldwide, including Moody’s, Standard & Poor’s, Fitch and DBRS, with 95% of the sector being dominated by the first three agencies.

Rankings work on a scale from Prime (best credit rating) to In Default (lowest credit rating). Though the ratings agencies apply different rating labels, the ratings tend to correspond. The highest rating is called AAA (S&P, Fitch) or Aaa (Moody’s) while the lowest rating is D (S&P, Fitch) or C (Moody’s). There are, of course, short-term ratings at play as well, though the long-term ratings tend to be a bigger concern as they have a greater and more lasting impact on the country’s economy.

Junk status – the rating most recently given to South Africa by S&P – indicates that the ratings agency in question deems the country non-investment grade (BB+).

Though ratings are usually reviewed quarterly it’s important to note that a quarter is quite a long time to woo investors and international lenders and restore international sentiments. In fact, if the economy is not already in tatters, these ratings often push countries over the edge where the point of return is a steep and slippery slope which has no quick escape. Rand Merchant Bank’s research points towards a 7.5-year average for a country to bounce back from junk status should every effort be made to rebuild its economy and political stability.

S&P, of course, saw no problem in skipping the quarterly rule to send South Africa’s rating to the trash can two months prematurely – an indication of the critical mess we now find ourselves in. Moody’s issued a statement on the same day, stating that they’ve placed South Africa in review as well, although they will only reveal their decision in a month or two.

Further to the country ratings, it’s important to note that the ratings agencies also rate individual cities and businesses. Among the cities also placed in review are Johannesburg, Ekurhuleni and Cape Town.  Mayors of these respective cities have expressed concern as the downgrade and review would hamper their economic growth, job creation and service delivery and would have a devastating impact on existing community projects.

What junk status means for South Africa

Most South Africans won’t feel the pinch of junk status immediately, but the repercussions will be widespread and tangible to all who live in or own assets in South Africa – whether living inside country borders or without.

Since junk status is a clear red flag for lenders and investors, the immediate knock-on effect is a closing of those taps which boost national and local government’s purse. This means the cost of government debt and its corresponding interest will significantly increase, which would both stifle service delivery and hike up the costs of such services.

The implication of a ratings downgrade could include:

• A halt or abatement in infrastructure development
• A halt or abatement in public services, housing and development projects
• Raised interest rates on all credit and loans to South Africans and South African businesses
• A review of credit risk criteria which would make it harder for South Africans to borrow
• A reinvestment of South African investments like pension funds with alternative international investment managers or funds due to these asset or investment managers’ risk and investment rules
• Increased cost of goods due to inflation, higher interest rates, higher cost of imports and increased petrol prices.
• Higher cost of living.
• A decrease in equity investment as investor sentiment becomes more conservative towards South Africa
• A decrease in government subsidies and grants to South Africans
• Job losses, retrenchments and a decrease in job creation as businesses must cater for the rising costs of service delivery and debt repayment
• Raised taxes to cater for the loss of foreign investment and higher interest paid by the South African government on debt.

South Africa’s credit rating downgrade and your retirement savings

As mentioned above, a ratings downgrade could see South African financial services companies may have to reinvest their money in alternative investment funds as certain funds and asset managers have rules which prohibit them from dealing with non-investment grade countries, institutions or individuals.

Furthermore, many funds or fund administrators give individuals investment options for their pensions, provident funds or retirement annuities. Individuals often have a choice as to where and how their money is invested. For South Africans whose retirement savings are invested in government securities, money market or other local South African businesses, assets or industries affected by the credit downgrade, this essentially means they could see far lower returns on their investments than initially projected and their existing assets could devalue significantly over time.

I’m a South African expat, what should I do with my pension or retirement fund?

Although much of the advice offered to South African emigrants living abroad has thus far been speculative, it’s quite clear that your investment options within South African borders have now tapered off to a very limited spread.

Although you can’t make up losses already incurred within the last week, it’s possible to safeguard your savings from further depreciation and return your savings to a stable or even higher value if reinvesting these funds abroad.

Move your retirement annuity or pension out of South Africa

Rand Rescue can assist you in repatriating the proceeds of your retirement savings to your new home. We’ve already repatriated more than R650 million for South Africans across the globe in the past five years and can offer you swift, hassle-free, and cost-effective solutions.

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