On Friday (24 November) ratings agency S&P Global downgraded South Africa’s local currency debt to junk status, making it the second agency after Fitch to declare the country as full junk.

The move is expected to have a far-reaching impact on the South African economy, with a possible downgrade from Moody’s coming in 2018 leading to a potential loss of R112 billion.

Less understood is how S&P’s downgrade is likely to directly affect the average South African.

Happy Ngale, financial wellbeing consultant at Alexander Forbes Retail, has outlined some of the biggest changes everyday South Africans can expect.

Increase in food prices
The exchange rate against the dollar is most likely to weaken, resulting in an increase in the price of imported goods and services. The cost of transport rises, and manufacturers pass these increased costs onto the consumer, putting further pressure on our household finances.

Increase in interest rates
With the weak rand, we could see interest rate increases, which has a direct impact on debt repayments – home loans, credit cards, personal and car loans. This will affect your ability to service your debt and still be able to afford basic daily expenses because it will leave very little for you to be able to pay for essentials and still save.

Less money for social grants
A credit downgrade is critical for the country’s ability to borrow from foreign investors, because the lower the credit rating, the higher the interest rate they will need to pay to the lenders for the amounts borrowed. Higher payments towards debt will leave South Africa with less money for services such as healthcare and social grants.

Lower job security and unemployment
This kind of pressure could affect corporate companies. Many people have already been retrenched, and salary increases and bonuses in the future are tenuous. Retrenchments also mean that government is unable to collect taxes – their main income stream.

Need for tighter budget control
South Africans are inclined to react emotionally to the change to junk status, however Ngale suggest that by understanding the implications and planning accordingly, people can ensure their financial well-being.

“Take a good look into your finances and start with your budget,” Ngale said.

“You will need to ensure that you adjust your budget and also stick to it. Live within your means. A good budget is useless without the discipline to follow it. Look for alternative ways to reduce your spending and be creative about it to ensure you can still enjoy your life. If you like spending time with friends, consider rather doing this at home.” 

To plan ahead, Ngale said it was important to stay invested and stick to your long-term investment plan.

“If you can, increase your short term savings in order to take advantage of the high interest rates and also to use when the going starts to get even tougher. Diversify your investments – invest in different investment buckets (asset classes) to buffer any risk which may affect certain areas of your portfolio.”

Avoid taking on further debt as it may be difficult to pay off debt, taking on more will only make things even more difficult. It is very important that you maintain your financial wellbeing – ensuring that you are financially healthy and secure.

“You can achieve financial wellbeing by setting goals, managing your budget and your debt, setting goals and saving towards those objectives,” concludes Ngale.