Is the South African Economy in Ruins?

Mar 07, 2016

The news is full of it. The 'know it alls' are emerging from their cubicles. The question remains though. Is the South African economy in ruins?

The South African economy in 2016 is at a cliff edge. Many believe that some hard times lie ahead as well. The unfortunate truth is that political and socio-economic happenings of late has a negative effect on the growth of the South African economy.

International investors show growing concern about the forecasting of economic growth in South Africa. The IMF has slashed the growth rate to 0.7% which means that the growth of GDP in South Africa is just keeping up with the rate at which the cost of debt in and for South Africa is rising.

The South African president’s antics over the holidays haven’t helped either. His unexpected sacking and appointing's of Finance Ministers hasn’t helped the value of the Rand.

All these factors have come together to create doubt in the mind of credit rating agencies. South Africa’s credit rating is now close to a junk status.

This means that according to these agencies South Africa is very liable to default on credit repayment. Although South Africa doesn’t yet have a junk status the cost of debt in South Africa has already risen in 2015.

So what does this mean for the South African economy?

When South Africa’s credit rating falls to a junk status it will cause the cost of South African debt to rise. So, with a slow growing economy and rising cost of debt, South Africa is being dealt a double whammy of negative impact on its economy.

This means that interest rates will probably be raised again (due to the fact that cost of debt has risen). When interest rates rise the South Africans who are in debt will have to pay more towards credit repayments. That brings into effect a higher probability that South Africans will default on their repayments. This means bad debt is a growing concern in South Africa.

Bad debt doesn’t bode well for an economy. It means a bad return on investment for the lender and a negative impact on the credit rating of the borrower. It is a dark cycle that contracts an economy. The lenders have less money to lend out and the borrowers have less chance of qualifying for debt. A gap then starts to emerge between borrowers and lenders and a credit market then no longer has sufficient leverage to stimulate a country’s economy.

In short – South Africa’s economy is not doing well. The value of the rand is weak. The credit rating is close to that of a junk status, but -

It is not yet in ruins.

South Africa is a land of immense opportunity. There are ways to ensure long-term growth for the South African economy, but for the short-term, we are in for a bumpy ride. Every South African citizen has the responsibility to reign in their credit spendings that will create more debt and to build towards the economy through supporting ventures that will build and not break down. Soon enough, we trust the bumpy ride will be over.

 

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