Junk Status – What Does It Mean?

Apr 2017

The last week has been a tumultuous one for our country. Especially when all that you read is about South Africa having to downgrade to  ‘junk status’ What does this mean?

Don’t panic folks, in this blog I will share with you what junk status means, and importantly how does it affect the ordinary consumer. I am here to educate you and in some small way ensure you make wise money choices.

In a nutshell, junk status refers to :

A scenario when rating agencies downgrade a country’s credit rating, meaning that we as a country will need to pay more if we needed to borrow money.
Why did this happen you might ask? Basically, the rating agencies were not too pleased with the level of political uncertainty in the country and the latest shuffling of Ministers added considerably more weight to our political risk going up, and this was a seen as a major reason that pulled us into junk status.
At the same time that the country’s risk ratings went up, so did all the major financial institutions. Which means that if the country, banks or SOEs need to borrow more money, they will pay more for such borrowings. The net result is that at the end of the day, ordinary consumers are hit hardest. Banks will increase their interest rates and there will be other increases in the cost of goods. And so inflation goes up and your one rand can buy less than it actually can.
Economic studies have shown that very few countries have reversed a junk status rating and that it takes on average seven years to improve the rating. On average, you can expect an increase of approximately 3% in the rate of interest. Here are a few calculations to show you the impact:

Example

You bought a car to the value of R400,000 and financed it over a five year term. With interest rates going up by 3%, your repayment will increase from R8,598 to R9,204 per month, an increase of R606 per month or 7% from the original installment.
The average household that has a range of financed debt in terms of a home loan, car loan and credit card will see an average increase of approximately 10-14% in the total monthly installments.
But it’s not all doom and gloom. In any negative situation, one can either look at the clouds or one can choose to look at the silver lining of the clouds. Here’s some tips to help you weather the storm:

My Tips for saving money in tough economy

Cut back on any wastage in your expenses. I mean do you really need to drive that fancy new car that’s costing you an arm and a leg?  By the way, did you know Citton Cars will buy your car even if you don’t buy another car from us? Just saying!
Don’t waste money. Seriously. Keep a log of how much you’re actually spending. You will be amazed how much you can actually save.
As far as possible, don’t reduce your bond repayments should interest rates go up. You will be shocked when you see how much shorter your bond term gets reduced by should interest rates fall again.
Live within your means. Don’t spend money you don’t have. If you have to wait to buy that special something. Do that and when the time comes, at least you have the money and the choice to still decide if you want that item or not.
If you have to scale back on luxuries and nice-to-haves, do it. Every cent helps.
Reduce your debts as soon as possible.
As far as possible – Save, save, save.
South Africa, remember that junk status is a term that some clever banker or economist came-up with. It absolutely does not mean or imply that you or I, or even our country is junk! Being an eternal optimist and in the words of the holy book: This Too Shall Pass.
Andrea Prelorenzo