Junk Status Is Not The End - It Can Get A Lot Worse!
However - things can get much worse
Source : Moody’s We are currently Baa3 with Moody’s and are on a negative watch with them which means they will put South Africa on Ba1 (i.e. junk status) if we don’t get economic growth on an upward path and rein in our rising debt. As you can see, we can keep dropping to Ba2 and all the way down to C which means South Africa has defaulted on its debt obligations and there’s little prospect of recovery. It can happen – just look at Venezuela and Zimbabwe – where optimistic assumptions are made on economic growth and government expenditure but in fact the country just raises taxes, incurs more debt, until you need to borrow money just to pay off debt that falls due. Each drop on the Rating Matrix raises the cost of borrowing and the downward spiral continues. The ultimate problem with this scenario is that it eventually becomes irreversible, which is when default on debt becomes a distinct possibility. The reality is that until genuine reforms are put in place, we will continue to descend along the Rating Matrix ladder. What should we be doing? Paying off as much debt as possible is a good start. We should also carefully consider any future expenditure and analyse just how necessary it will be, particularly if it is in foreign currency. Some analysts recommend that we should become as self-sufficient as possible (e.g. boreholes, solar power). |
Provided by MVB Audit & Advisory
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