And what does all this have to do with your personal life goals?
When the two rating agencies Moody’s and S&P downgraded South Africa’s credit rating over the firing of Finance Minister Pravin Gordhan, many were concerned about an “economic earthquake”. Strangely, the rand has since strengthened, now under R13 to the US dollar.
After all that happened, if you find yourself amongst those who are still not sure how exactly this will affect you and what this means, then you’re not alone. This is one of the most common questions we’ve had from our clients in the months since the downgrade.
And then just recently, news broke that our economy is actually shrinking with unemployment on the rise and business confidence falling. What does all of this mean?
Let’s break it down. First the downgrade: Investors listen to rating agencies when they decide which country amongst the many in the world to invest their money in. Two of the three major ratings agencies have expressed an opinion that investing in South Africa is a bit more risky than it used to be. This means that they’ve taken us out of being considered “generally safe” to being considered “kind of risky”.
What countries are in this camp?
Generally safe: UK, US, Austria, Botswana, France
Kind of risky: Russia, Brazil, Costa Rica, Bahamas, South Africa
So what does this all mean?
It will cost more for the South African government to borrow from overseas, than would have been the case otherwise. Also we can expect less money to flow into the country than would have been the case before and more money to flow out.
The news about the recession earlier in June means that our economy has had two consecutive quarters where it has shrunk and not grown.
What economists are worried about are the potential knock-on impacts of what all this could mean:
Price of everyday things could go up faster: Right now inflation is around 5 to 6%, meaning that the price of everyday things like petrol doubles every 11 to 12 years (the time it takes to finish high school). If things get worse and our inflation rate goes above 10%, the price of petrol could double every 5 years - so by the time a child in grade 8 finished matric, petrol could cost R26 per litre.
We have to pay more on home loans, car loans, credit cards: If inflation goes up, generally so do interest-rates. A R1.5m house would have repayments of R22k instead of R15k per month.
Our holidays and gadgets we get from overseas costs a lot more: Money going out of the country and less coming mean means a weaker rand: An iPhone 7 costs in the region of R20k, rather than R13k today. A 14 day holiday could get cut to 8 days.
We all have to work a lot longer to have the same quality of life in retirement: if the economy doesn’t grow or shrinks, a person in their 30’s now will have to work 9 years longer before they can retire with the same quality of life as before.
The bottom line: it could mean that you have to be earning around R5k after tax more in today’s money terms to have the same quality of life as before. Or you may have to push out goals that you had.
Thankfully none of this has happened yet, nor is it likely to happen overnight. For all we know, our economy may start to grow a lot faster and all this could be worrying for nothing.
Or the other way to look at it is that because none of it has happened yet, there’s time to put measures in place to protect your lifestyle in case it does.
And there are definitely actions one can take - from investing offshore to looking for additional sources of income. The best time to install a fire extinguisher is before the actual fire.
Depending on what your goals are, what you need to do may be very different - as with everything we do at LifeCheq, there’s no one-size-fits-all recommendation - it’s all about you and your life goals.