How Does Junk Status Affect You?

South Africa’s downgrade means that ordinary people in the country will have less money in their pockets. Françoise Gallet examines this issue.

- Francoise Gallet

Credit rating agencies Standard & Poor Global Ratings (S&P) and Fitch Ratings recently reduced South Africa’s sovereign credit rating from investment grade to sub-investment or junk status. But, what does this really mean? And, how does it affect you?

Rating agencies study the details of a country’s economy such as unemployment and growth prospects. They then provide an assessment of the country’s economic performance for investors to use when deciding to put money in the country.

Why do we need investors?

Investors provide capital to build infrastructure – roads, dams, power stations, railways and schools – needed to create jobs and grow our economy. “Although some of the capital for this can come from taxes, there is a mismatch between the available tax revenue and the capital the government needs to grow the economy,” explains Busisiwe Radebe, an economist at Nedbank. Taxes bring in an estimated R1.41 trillion, while the scale of the country’s development needs R1.56 trillion (according to the 2017/18 budget estimated expenditure). To make up the shortfall, the government must borrow capital. Therefore, the National Treasury issues bonds (essentially a promise to repay borrowed money at a fixed rate of interest at a specified time) that international and local investors buy.