This piece is intended to give a very broad understanding to UASA members what a ratings downgrade means
and to inform us so that we can debate it among ourselves. Debating it will help us to develop a better understanding about the subject matter which in turn can help us to make plans to survive.
What does a ratings downgrade mean?
Think of your personal creditworthiness. If you are a bad risk due to not paying your accounts on time every time or you have borrowed more than you can afford, either by way of micro loans, personal loans, credit cards, etc., you develop a bad name and a bad credit record. Ultimately, you can be blacklisted, making it difficult and very expensive for you to get credit.
Similarly, our government also has a bank account and also has to budget. In order to deliver on all the promises made to the people, we need money. The money comes from the taxes that you and I pay, and that businesses are paying. Since the bulk of taxes come from businesses and they provide and create jobs for us so that we can pay tax, it is important for government to create an environment where businesses feel comfortable to operate, make profit and where they feel the money they invest will be safe. In the case where not enough money can be raised through taxes internally, government borrows money overseas. Currently, our foreign debt stands at R2.2 trillion, and 13c out of each rand goes towards paying the interest on our foreign debt.
International investors look at ratings agencies like Standard and Poor’s, Moody’s and Fitch if they want to invest. If there is political instability in a country, like currently in South Africa, the risk to investors increases. This results in investments drying up on the one hand and on the other hand, they might still lend money, but at a higher interest rate.
So, how will the ratings downgrade affect us, the workers?
- Instead of paying 13c out of each rand to service the interest on our debt, we could end up paying substantially more, which leave less money for grants, development and education.
- We could easily slip into a recession, meaning that economic growth which is currently at around 0.7% could get even worse, slipping into negative economic growth.
- Unemployment is set to rise even further.
- Pay increases may drop below inflation.
- Rising inflation, which means that we will pay more for food, housing, and other necessities.
The above points are exactly what happened to countries like Brazil, Bulgaria and many others after they were downgraded.
Can we get out of this situation and how long will it take?
It all depends on the outcome of the political turbulence we are experiencing at the moment. If a new political leader can emerge, one who can instil confidence that we are in control of our finances and the economy, and we can back it up with the necessary supporting policies, it could take approximate two years. If not, however, it could take ten years or even longer. Also bear in mind that the downgrade has a repetitive cyclical effect that can pull us down in a dangerous spiral of hardship. The longer it take to fix, the worse it will become. All the more important that we get the right leader to lead us out of the mess we currently find ourselves in.