GEORGE BUSINESS NEWS - Local business leaders have said that Moody's downgrading of South Africa's economy last Friday could have dire consequences for the local economy.
Moody's announcement came just hours after South Africa started the lockdown period, which in itself would influence the economy negatively.
Dr Dennis Farrell, chairperson of the George Business Chamber, said the downgrading could be the last straw for many SMMEs (Small, Medium and Micro Enterprises) across all sectors in the Garden Route after businesses in the Garden Route have been adversely impacted by various disruptions in the recent past.
According to him the bottom line of impact will be that money will become more expensive to borrow, the rand could weaken further against other major currencies and with the present high indebtedness of the South African consumer, the cost of servicing that debt will become higher.
Dr Willie Cilliers, chairperson of the AHi Western Cape, explained the implications of a downgrade. Credit ratings are a measure of the creditworthiness of a country's government, meaning that they show how likely the government is to pay back borrowed money.
These ratings are important because they influence the cost of borrowing. If a country is more likely to default, lenders will charge a higher interest rate to compensate for the greater risk, as they would if the borrower were an individual.
"So, to be clear, the three credit rating agencies - Standard and Poor's, Moody's, and Fitch - do not measure the health of the local economy. Rather, they assess the government's ability to honor debt commitments. These measurements take certain economic indicators into account and are themselves seen as indications of a country's economic prospects," he said.
With the downgrade, the government has to pay more in debt servicing costs, meaning that it will have less to spend on social initiatives and infrastructure. In order to plug the funding gap, government will have to increase revenue through higher taxes. But the effects of junk status don't end at borrowing.
"A downgrade would likely also cause the rand to depreciate, which would make imports like oil more expensive. This makes everything else more expensive. When inflation rises above a designated target range, the South African Reserve Bank puts the repo rate up, which increases the cost of vehicle loans, mortgages, and other long term loans. When lenders such as banks see a greater risk in borrowers defaulting, they increase premiums to compensate for the greater perceived risk.
"So, South Africans will also find it harder to qualify for new loans, and when they do secure credit, it will be more expensive, meaning that loans will be less of an option when finances are stretched," Cilliers said.
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