If you haven’t been living under a rock for the past two weeks, you would have noticed the turmoil and royal shit-storm that has hit our beloved country. If you have been living under a rock (which we all may be doing in the not-too-distant future), let me bring you up to speed on current events:
1. The President of South Africa recently recalled Pravin Gordan (Minister of Finance) and Mcebisi Jonas (Deputy Minister of Finance) from the investor roadshow held overseas;
2. He then proceeded to fire both of them, reshuffle his cabinet and place the Minister of Home Affairs (Malusi Gigaba) as the Minister of Finance; and
3. To which the market reacted swiftly to this information, resulting in two of the three ratings agencies downgrading South Africa to ‘junk’ (I’ll leave the finer details out for now). Moody’s is set to report in due course.
If we step back from the politics for a bit and just analyze the impact the above moves have on our country, we can anticipate the following:
1. A higher cost of borrowing for the South African government. Imagine you had to go to the bank with a bad credit record. If you were lucky enough to get finance, you would be charged a much higher rate than someone with a good credit record. That increased borrowing has to be paid by someone, right? Well, I doubt our tax base just got rich enough overnight to fund it.

2. Less supply of foreign investment into South Africa. If you were an investor sitting in New York and you had a choice to invest in a country with a good credit record (‘investment rating’) and a country with a bad credit record (‘sub-investment/ junk rating’), which would you choose? Not South Africa, of course!

The effect of this? Well, companies will rather open up shop in India or China, where the GDP growth rate is far higher than that of South Africa, as well as less risky than South Africa (credit rating wise). Heck even Morocco has a better credit rating and GDP growth than South Africa!

3. The South African ZAR to the Dollar will deteriorate. Investors will be reluctant to hold a currency that is linked to a shaky economy. They would rather hold more stable, valuable currencies. Therefore,…

Unlock the rest of this article with a 14 day trial

Already have an account?
Login here