A bit of background
South Africa is an emerging market and our expenses exceed our income. As a result we are obliged to take out interest bearing loans from other countries/financiers to meet our social and other responsibilities.
What does Junk Status mean in laymen’s terms?
Junk status is where a Country’s sovereign credit rating has been downgraded by the international credit ratings agencies to such a degree that it is no longer an attractive investment destination because of the various risks attached to the lending. These risks are both real and perceived. Xhati Payi – Economist - sums it up in one sentence “If South Africa were a person, most banks and credible institutions would not lend to us, or lend at very high interest rates.”
What does it mean for education costs?
The downgrade to junk status is normally combined with a devaluation of the Country’s currency, combined with a rapid increase in interest rates and high inflation rates. If the country has to pay more interest on its loans the cost must be passed on. Whilst there might be no direct increase in education costs there is always a ripple effect.
What does it mean for teacher salaries?
In an environment of high inflation there is an expectation of high salary increases to maintain a certain lifestyle.
What does it mean for education resources such as electronic tablets & more?
The devaluation of the currency will lead to an increase in the price of imported goods, including books and all electronic appliances.
What does it mean for the average household?
A downgrade to junk status unfortunately affects the poor the most. With an increase in interest rates all loans will become more expensive and the disposable income of the average household will shrink. A level of belt tightening is inevitable. The recent petrol price increase, mainly as a result of the devaluation of the rand, is the first “ripple” to be felt. Petrol price increases are passed on to everyone through direct costs (taxi and bus fares) and indirect costs (marking up of groceries etc. to cover the increased costs)
Will we lose education experts to the rest of the world?
There are many reasons why Educators leave a country, including economic and political. It is a sad reality that local Educators are very poorly paid compared to their International counterparts and there are many well qualified South African educators serving abroad. A poor salary, ever increasing taxes and inflation will do little to encourage local Educators to remain here.
Which LSM is affected the most by this?
There no little distinction, high inflation and high interest rates affects every LSM. The wealthy may be better geared to handle the increases.
What can one do to limit the effects of the junk status?
The simple rule is to live within your means and budget accurately. Seek the advice of a financial planner if you are unsure and think twice before entering into long term interest bearing loans.
Answers provided by two of Momentum’s Senior Investment Consultants, Eric Windell and Thamsanqa Khumalo.
You might also want to read about education savings & inflation.
