Junk status I: How will it affect me?

A2“Now is the winter of our discontent” (Shakespeare)

The first thing to rise would be interest rates. If you have a mortgage bond or have financed a car, your monthly payments will rise. As a rough example, a bond of R500,000 would cost R837 more a month if interest rates increased by 2.5%.

The next shock would be another slide of the currency, the reasons for which we discuss in the next article. The price of petrol will increase. This will come at a difficult time as it appears that the cost of crude oil is now beginning to move upwards and the Rand decline will magnify petrol price hikes – we could be looking at R1 per litre initially and then ongoing monthly petrol price hikes.

You will have noticed that petrol price rises lead to a variety of cost increases – from airline tickets to the price of food. Many of our basic foods (maize for example) are priced in dollars and this will lead to further cost pressure.

We have some militant unions at the moment and we can expect immediate demands for higher wages which will add to inflationary pressures.

All these cost increases will reduce economic growth and as the current growth rate is only 0.6%, there is a strong possibility the economy could enter a recession.

Thus, we could face a period of low or negative growth coupled with growing inflation, and a weakening currency resulting in more interest rate hikes. This creates potential for a debt default – those of us who remember 1985 will recall that interest rates rose to 25%. In the bond example above, this would translate into bond payments going up by more than R5,500 a month.

The average time it takes to recover from a downgrade to junk status is 7½  years.

We are already facing tough economic times – a drop to junk status will, as they say, put the country into a long “winter of discontent”.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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