What junk status means for property market

© Ed Sweetman – 123RF.com

We managed to avoid a downgrade last year but were not as lucky this time around. While only one of the rating agencies at this stage, it is likely that Moody’s and Fitch will follow suit and take the same view as S&P. Homeowners with high debt levels should brace themselves for interest rate increases. They will need to focus on reducing their short-term debt as soon as possible and consolidate long-term debt by increasing repayment installments to eat into the outstanding capital debt faster.

What does the downgrade mean for the country?

In simple terms, the cost of credit will increase. A junk status means that it will cost more for the government to borrow money, which in turn will have a knock-on effect on the consumer. Financial institutions will need to hold more money in reserve, which will make it more difficult to obtain credit, and the credit that is granted will come at a higher cost. A marginal mitigating factor is that, to some degree, financial institutions have already made provision and priced in the effects that a downgrade would have on credit costs.

Needless to say that increased cost of credit will dampen consumers’ desire to purchase large-ticket items such as property and motor vehicles. Over the last while, prospective homebuyers have already been subjected to interest rate hikes, drought-driven food price inflation and rising electricity tariffs. An increased cost of credit would be too much to bear for consumers who are already struggling to deal with the growing cost of living.

Scare away foreign investment

Another downside to the downgrade is the fact that it will scare away foreign investment, as the country will be perceived as far too risky. Investors will shy away because of policy uncertainty and the government's policy regarding foreign investment in land being discouraged. If demand from foreign investors dwindles, the prices of assets will depreciate, along with the currency. A fall in the rand will increase inflation and place pressure on interest rates, as well as the cost of imported goods. The result of all of this is that the country will be in a “catch 22” situation struggling to claw its way back out of junk status. It is far easier to maintain an investment status than it is to improve the status once downgraded. The research concluded by Rand Merchant Bank reveals that, on average, it takes approximately seven to eight years for a country to recover from a downgrade.

The downgrade will slow the economy further, which will impact the government’s ability to maintain and upgrade infrastructure. The higher cost of credit will also slow the building sector as developers struggle to get the financial backing they require to initiate further projects.

If there is an upside to the downgrade, it will be for consumers who have cash. Investors with access to cash will be able to benefit from the predicted price stabilisation or decrease and will have more negotiating power in the market. The tourism sector will also benefit from a weakening rand as travel to South Africa becomes cheaper for those with foreign currency.

South African consumers are urged to prepare themselves financially by reducing debt levels and putting away savings.