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No doubt S&P downgrade will impact consumers - credit bureau

Apr 05 2017 17:02

Cape Town - The S&P downgrade of SA's foreign currency debt to junk status is no doubt going to impact consumers, businesses and government, cautioned Jacobus Eksteen, senior data analyst at credit bureau Compuscan.
 
"The question is, to what extent? Companies, especially parastatals, will be seen as having higher implied risk. Therefore, it will be more difficult to issue debt in the sense that there will be less demand and the demand will be at higher interest rates," explained Eksteen.

"Institutions buying the debt will also know that they will have to take on more risk, which makes the higher interest rates less attractive."

He said it is ultimately a negative sum game for South Africa, as "someone" loses.

"Companies will most likely need to pay more to service debt, thus reducing their profit and potentially increasing pressure on consumers by offering lower value for money to try to compensate," said Eksteen.

"Further, economic growth stems from consumers’ ability to spend and with this being impacted the economy will also be negatively affected, resulting in fewer jobs and less disposable income amongst consumers."

As for the banking industry, in his view banks are likely to struggle more to get funding and their cost of capital will increase. This is especially true for banks that obtain a large part of their funding from foreign sources.

"They will also very likely try to shift the pressure to their retail and commercial clients. On the plus side, SA’s banks are well capitalised and relatively stable,” said Eksteen.

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