In April, South Africa was downgraded to the long-feared “junk status”. Citizens were outraged that it had come to this, but the rand didn’t plummet overnight and interest rates weren’t immediately doubled, so you might be wondering, what are the implications, really? We’ve highlighted the areas in which you are most likely to be affected, and detailed what you can do to “junk proof” your finances.
What does junk status mean for South Africa?When a country gets downgraded to junk status, it means that some of the ratings agencies (Moody’s, Fitch and Standard & Poor) believe that there is a risk that its government will not be able to service its debts. Therefore, all credit provided to the government will be billed at a higher interest rate, which means that the government will spend more money paying it back, and less on social grants and economic upliftment.
The knock-on effect of this is that lenders within the country also charge higher interest rates to the general population. Another consequence is that foreign investors look elsewhere, to countries where there is greater growth potential.
Over time, the buying power of the currency slowly erodes, and the availability of credit is reduced, and everything costs more.
Here are some ways that you can protect yourself, and lessen the impact on your finances.
Reduce your reliance on credit Chances are that in the medium term, the interest rate you will be charged on your debts – from your home loan to your credit card – will go up. This means that you will spend more on paying back the exact same debts.
Focus on paying back all your debts as quickly as you can, dealing with the debt with the highest interest rate first – this is most likely to be your credit card.
Get your home loan under controlAlthough home loans have relatively low interest rates, they tend to take up a large part of your budget because they represent an expensive asset. If your home loan interest rate increases by even as little as 1% or 2%, you could end up paying significantly more each month. For example, on a home loan of R1 million paid back over 20 years, here’s what you would pay:
- at a 10.5% interest rate - R9 984 per month
- at a 11.5% interest rate - R10 664 per month
- at a 12.5% interest rate - R11 361 per month
That’s a lot of extra money to come up with each month.
For this reason, it is worth speaking to your bank or home loan provider about fixing your interest rate, bearing in mind that the fixed rate they will offer you will be slightly higher than your current rate, so there will be short-term losses for potential long-term gains.
It’s also worth paying a little extra (or a lot extra) into your bond each month to eat into the interest faster. Another benefit of this is that if the interest rate goes up, you are already used to paying more.
Thinking about buying a house in the near future? Chances are that it will become harder to get a home loan in future. So now is a good time to do it – while banks are still fairly lenient with their lending criteria.
Just remember that debt is about to get more expensive and don’t stretch yourself to your financial limits when selecting a property. You could well end up paying back more in interest in the years to come.
Get serious about spending less There is a good chance that the rand will continue to devalue and that imported goods, which include oil for petrol, will start to cost more. This means that the cost of everything from groceries to clothes will skyrocket.
Be proactive about cutting household expenses now, so that you’re already in the habit when things get tight.
- Shop comparatively, and cut back on items you don’t really need to create more room in your budget.
- Find ways to reduce your electricity bill or to identify the cheapest way to heat your home. Follow these tips to reduce the costs of car maintenance.
- Do what you can to bring your data bill down.
- Identify the items that you waste money on and cut those out of your budget.
- And simply consider all the different ways that you can save money, even if it’s only R300 a month, so that you start running a lean ship in hard times.
Protect against job loss With the likelihood of the economy contracting, some companies will be forced to retrench staff. The most important step you can take here is to not be complacent about secure employment – do your job, do it well and always look out for opportunities to go the extra mile or to better yourself.
If your company doesn’t offer job training or upskilling, consider doing a free online course, or completing a short course in an area of interest to you that could potentially become a new career path.
Look for ways to supplement your income that could possibly become a back-up career should your full-time employment be under threat. You could also investigate retrenchment insurance cover.
Don’t let junk get you down The downgrade isn’t good news for South Africans, but don’t get disheartened. Rather take some time to focus on your financial plan, and see where you can tighten your belt or improve your financial situation. It will stand you in good stead in good times and bad.