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Junk downgrade will hit debt-ridden consumers hard

Apr 05 2017 05:02
Carin Smith

Cape Town - The downgrade of South Africa's sovereign debt rating to junk status by Standard and Poor's is going to have a massive impact on deeply indebted South Africans, according to Neil Roets, CEO of debt management company Debt Rescue.

S&P downgraded SA’s long-term foreign currency rating to sub-investment grade on Monday evening. The ratings agency said the massive Cabinet reshuffle shortly after midnight on Friday has put policy continuity at risk.

Roets said the downgrade will have an immediate impact on all South Africans because it will complicate the process of economic recovery, further impact on the already sky-high unemployment rate and make Treasury’s job of collecting enough taxes to fund government’s spending more difficult.

“There is a massive misconception among many South Africans that decisions by ratings agencies impact mostly wealthy South Africans. Nothing could be further from the truth, because the reality is that it will have a profoundly negative effect on all of us," warned Roets.

“The SA Reserve Bank (SARB) will be under pressure to review the repo rate upwards which will increase the repayments on mortgage bonds, credit card debt and the cost of virtually all other goods and services."

Roets pointed out that over 50% of South Africans are three months or more in arears with their debt repayments and that the overall debt situation is dire.

He said total consumer debt is now standing at close to R1.6trn, according to latest SARB data. A recent World Bank index has also shown that SA is one of the most indebted countries in the world.

READ: Gigaba now faces stark economic realities - financial expert

How to cope with short- and long-term debt

Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa, advised consumers to pay down short-term debt and consolidate long-term debt.
 
In his view, the S&P downgrade will have a negative impact on the housing market and all consumers.

“Homeowners with high debt levels should brace themselves for interest rate increases. They will need to focus on reducing their short-term debt as soon as possible and consolidate long-term debt by increasing repayment instalments to eat into the outstanding capital debt faster,” advised Goslett.
 
“A junk status means it will cost more for the government to borrow money, which in turn will have a knock-on effect on the consumer. Financial institutions will need to hold more money in reserve, which will make it more difficult to obtain credit and the credit that is granted will come at a higher cost."

He added that a marginal mitigating factor is that to some degree, financial institutions have already made provision and priced in the effects that a downgrade would have on credit costs.
 
"Needless to say that increased cost of credit will dampen consumers’ desire to purchase large-ticket items such as property and motor vehicles," said Goslett.

"The higher cost of credit will also slow the building sector as developers struggle to get the financial backing they require to initiate further projects."

Goslett added that, if there is an upside to the downgrade, it will be for consumers who have cash.

“Investors with access to cash will be able to benefit from the predicted price stabilisation or decrease and will have more negotiating power in the market," he explained.

READ: Zuma's power play backfires as SA downgraded to junk

Speak to your bank

Chris Gilmour, ‎investment analyst at Absa Wealth & Investment Management, also cautioned consumers that interest rates will most likely rise due to the downgrade, thus increasing the monthly cost on items like home loan and vehicle finance repayments. If the rand weakens, the price consumers will pay for imported goods will also likely increase.

"Let’s take the average South African who has a home loan, vehicle finance, perhaps a personal loan and a credit card. Being downgraded to junk status, we could conceivably – over time – be paying 2% to 3% more to service this debt,” explained Gilmour.

“We will see no proportionally linked wage increases in the near future and the ability of your average consumer to repay their debt is going to be hugely compromised. It’s going to mean the consumer will be under relentless pressure – particularly the consumer who is already over-indebted.”

He therefore advised consumers - especially those heavily in debt - to get their indebtedness down significantly.

"And if you find yourself struggling to cope with your financial commitments, speak to your bank early on, to see what plans can be put in place to assist,” he said.

Read Fin24's top stories trending on Twitter:

s&p  |  money  |  consumers  |  debt  |  downgrade  |  property  |  sa economy
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