The direct impact of the downgrade of South Africa by Standard & Poor’s, is largely seen on the screens of financial traders.
The national currency, the Rand, has lost ground, bonds and Bank stocks fell, and there is a General impression of doom.
Of the big three rating agencies, only Standard & Poor’s downgraded the sovereign debt of South Africa to below investment.
Should Moody’s and Fitch to follow suit, major international investors such as pension funds will be forced, under their own rules, to sell to the South African government debt. These regulations require two of the three to go to the junk status.
The largest banks of South Africa was quick to point out that they are financially stable and well built to withstand the impact of the sovereign rating of the country.
However, shares of banks have a significant battering.
But the turmoil on currency, bond and stock markets will spread to the economy as a whole soon enough.
As Rand crashes, inflation will increase. This is because the price of imported goods rises in local currency. The flip side of this is that exports become cheaper and more competitive.
The growth of inflation, the Central Bank, the Reserve Bank will have to raise interest rates as measures. This allows the cost of mortgages, home loans and other borrowings ordinary South Africans want to do more.
It also makes the cost of borrowing for companies more expensive and, as such, plays a role in the slowdown in economic growth.
The rising cost of loans and the slowdown in economic growth may lead to job cuts. South Africa’s economy grew last year by only 0.3% instead of 1% this year.
In fact, some economists say the downgrade to “junk” has the potential to cause another recession.
Getting out of the “junk” level is difficult. According to Bloomberg, over the past 30 years, only six of the 20 countries that were in the trash managed to get out of it.
And the time required for those who received a rating of investment grade ranges from 13 months to 11 years. The average time is about seven years.
So, the mirror was cracked? South Africans in line for seven years of bad luck?
The initial signs are not good. But still the rating agencies were very patient with South Africa.
They warned that the political infighting and sluggish economic growth are the main factors that could lead to a downgrade.
And they said more than a year.
What kept my finger on the button “junk” level confidence in the former Minister of Finance Praveen gordhan said, but the knowledge that South Africa has strong institutions and a working democracy.
It also has a number of industries, which are among the best in the world, in particular, mining and financial services.
If a good degree of political stability can be quickly achieved, going forward, the chances of South Africa to pull yourself away from junk status in less than seven years to dramatically improve.
If not, the country risks falling off the radar of the International investment community. If this happens, time could get hard, and hold on to the millions of South Africans.