Junk Status: Facing the realities of a potential downgrade

At Lifeforce Financial Services, we’ve fielded an increasing amount of queries around the wisdom of investing locally, or shifting all portfolios offshore, specifically in the light of the widespread media coverage and speculation regarding South Africa’s credit rating and the likelihood of a downgrade to “junk status”.

Why the potential downgrade?

In simple terms, South Africa is facing a downgrade for two reasons:

1. Slow growth – along with the rest of the world, SA faces lower levels of growth than forecast (and these forecasts continue to fall). There are a multitude of reasons for the slowdown including depressed commodity prices and reduced global demand for commodities, but also a lack of willingness to invest with all the current uncertainty around government policy.

2. Fiscal outlook – effectively this relates to the ability of the country to control spending given the tax base so that excess spending does not need to be covered by issuing more debt. With low growth and high unemployment, tax revenue is under pressure and spending on benefits is rising. The government’s target to limit gross debt to 50% of GDP is going to be very difficult to achieve.

All of this is not helped by concerns around the independence of the Treasury and the South African Reserve Bank. The long held belief of the international community in the strength of this independence was severely tested late last year with the “Nenegate” debacle. Political upheaval, which has led to calls for President Jacob Zuma to resign, is compounding the economic risks.

As a result rating agencies are expressing a concern that the ability for SA to meet future loan repayments is deteriorating. They will be looking very closely as to whether SA is able to control its spending (and ideally reduce it) while implementing government policy to spur growth. Cutting spending in an election year is going to prove challenging.

If you want to find out more – click on the link below to download our April Fundhouse update.