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Recession sparks credit downgrade fears

According to Fin24, the unexpectedly bad news on the economy entering recession has sparked fears that South Africa may cause Moody’s to downgrade our debt on October 12.

The rand has plummeted to R15.50 to the dollar as of writing this piece, and rand denominated bonds already have the lowest investment-grade rating with a stable outlook at Moody’s.

They said in March that if South Africa didn’t revive economic growth and stabilise debt the ratings outlook could become negative.

All of this means that it is increasingly expensive for government to borrow money.

The news only gets worse though – oil hitting a ten month high as our currency hits record lows, means that we’re importing inflation – because while our country has a lot of resources oil isn’t one of them.

The upshot of this being our reserve bank has a problem – do we hike interest rates with a weak economy, furthering stifling growth?

My Take

The word that struck me in the original report was “unexpected.” I don’t think it was.

There is a piece is My News24 written by Lew Skannen (yes I get the joke in the name) who pretty called it in 2017. Sure I don’t know who he is, but he called it, and he wasn’t the only one.

This was more or less what economists were predicting last year when South Africa’s credit ratings were slashed to junk status – that with the increase in the cost of borrowing, both for the government and private institutions, economic growth would be constrained.

Not only that, but if you follow the news. In a strong economy what happens when you hear that a shop is selling vrot goods? You don’t shop there. In our economy people engaged in looting.

Even just going shopping and looking around – there just isn’t the variety that you’d get if the economy was going well.

And all of this without even really getting into the complications of the land debate or current government policy in general.

Right now we’re still stuck with Malusi Gigaba’s budget. The VAT hike very likely is retarding demand for goods, and if we have an interest rate hike it is only going to get worse.

With the medium term budget next month – there needs to be some serious effort to correct course because this isn’t working.

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2 thoughts on “Recession sparks credit downgrade fears

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