The country has faced numerous financial challenges over the past few months with the credit ratings downgrade to junk status, and the cabinet reshuffle impacting the Rand. We are now in a technical recession, meaning we have had two consecutive quarters where the GDP contracted. However, while this may impact the Rand and other financial structures in the country, what does it mean for the everyday South African?
“South Africa’s economy entered a technical recession after gross domestic product (GDP) contracted by 0.7% in the first quarter of 2017. This news follows the recent decision made by Standard and Poor's (S&P) last Friday, 2 June, to affirm South Africa’s sovereign credit rating, keeping the local currency credit rating at investment grade and the foreign currency credit rating at sub-investment grade. The ratings agency has, however, maintained its negative outlook, identifying political uncertainty and weak economic growth as potential risks. South Africa’s foreign and local currency credit ratings were both downgraded to non-investment grade by Fitch Ratings in April and they are currently on review for a downgrade by Moody’s,” clarified Lizl Budhram, head of advice at Old Mutual Personal Finance.
What the recession means for you
Budhram offered the following insight into what the financial events mean for you. Any future downgrade by S&P for South Africa’s local currency credit rating could lead to reduced access to affordable credit, and could result in a potential interest rate hike. This would increase the cost of lending, affecting people who have debt.
“Higher interest rates increase the cost of personal loans from banks‚ home loans, vehicle finance payments and credit card debt. This would, in turn, hamper the economic growth we need to avoid further job losses and could also have a negative impact on foreign investment inflows, much needed given our low savings rate. While the most recent S&P decision is a relief, the country still has a lot of work to do in order to address issues like elevated political and policy uncertainty, which continue to put South Africa’s investment status at risk,” highlighted Budhram.
While these financial events may not impact you immediately, there will be repercussions for consumers. With the fluctuating Rand, imports will become more expensive, as well as push up interest rates and inflation, putting consumers under more pressure, according to Budhram.
“To counteract rising interest rates and reduced access to credit, consumers should focus on growing emergency savings funds, and make a concerted effort to reduce personal debt,” said Budhram.
Interest rates and the SARB
According to Johann Els, senior economist at Old Mutual Investment Group, the recession indicates that the South African Reserve Bank (SARB) has fallen behind the curve with regards to interest rate cuts. Due to the recession, Els and his team expect two interest rate cuts to be made before the end of the year.
“Should the SARB continue on their current path of holding interest rates, they will be making a serious policy error. Ultimately, we believe that that they will need to cut rates by July or September,” said Els.
Debt counselling firm DebtBusters, noted that weak growth and low inflation could remove pressure from the SARB to hike interest rates this year. “Now is a good time to obtain a credit report to see where you stand in terms of your credit status. Remember that even though interest rates may decrease in the next few months, taking out a new loan to cover another is only a short- term fix which will land you in even further financial trouble in the future,” stressed DebtBusters.
