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Tackle looming SA junk status creatively - debt expert

Apr 18 2016 17:54
Carin Smith

Cape Town - Although there is not much consumers can do to stop a possible ratings downgrade of South Africa to so-called junk status, there are certain proactive steps they can take, according to Wikus Olivier, debt management expert at DebtSafe.

International ratings agencies monitor countries’ gross domestic product (GDP) growth, budget and bank account insufficiencies to evaluate if the relevant country’s economy is worthy of credit and investment.

Olivier pointed out that contributors impacting SA's economy and ratings agencies' evaluation and possible downgrade, include the devaluating rand, instability in the mining sector, political turmoil and the protests at tertiary institutions. If downgraded, it will cost the SA government more to borrow money in global capital markets.

“The problem is that these international loans are charged at a higher interest rate for junk status countries – a cost that is passed on to the public to carry in the form of higher interest repo rates. The immediate effect will be that your bond will cost you more,” he added.
"The government’s debt will end up costing more and more and the only way to pay it off is to increase its 'earnings' via taxes in various forms. So, junk status will inevitably bring about tougher financial times."

Although a downgrade - or not - is largely in the hands of government and policy makers and depends on the economy at large, Olivier told Fin24 on Monday that consumers can still do something to prepare for the consequences of a downgrade to junk status.

His advice is to look at your own personal cash flow and to put a plan in place on how to deal with price escalations, as these will ultimately have the biggest impact on consumers' daily lives. He also pointed out that SA is producing less maize, which would mean more imports and the weak rand makes these imports more expensive.

"A downgrade to junk status would also impact the rand/dollar exchange rate, making imports likely even more expensive," he warned.

To mitigate these impacts, Olivier says consumers have to become creative in finding ways to save.

"We either need to increase our income or reduce our expenses. Determine if there could be an opportunity for you to earn extra cash and do it. Or reduce your expenses if you can - see where you can save. It could be something as simple as reorganising your debt or credit facilities," explained Olivier.

In his view, an example could be closing an expensive credit card facility and rather using a cheaper overdraft facility.

"Get creative and grow a vegetable garden. Be proactive, otherwise you might later find you have to dig yourself out of a hole," he warned. "People who are not proactive will end up in debt. I see people taking out payday loans just to get by, but you need to adjust your lifestyle to suit your income. It is about cultivating a simpler lifestyle. The more debt you are in, the more you will stress."

Be prepared:

- Write down your income and in another column, your expenses;
- Note down your essential living expenses as well as your non-essential expenses;
- Adjust your non-essential expenses to only include one or two items every month;
- Ask your fellow employees if they could join you in a lift club;
- Don’t use your credit card – only pay for things in cash or with your debit card;
- Stay positive.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

savings  |  ratings agencies  |  money


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