INQUISITR.COM / News & Politics

South Africa’s Economy Continues A Downward Skid And Could Become Junk By The End Of March

By Jinger Jarrett
Published on: 02:32 PST, Mar 15, 2016

Finance Minister Pravin Gordan went to the United Kingdom to try and woo international investors to South Africa. His goal was to prevent a sovereign downgrade and slow down the current South African economy’s downward skid.

Business Tech reported that Moody’s Investor Service has put South Africa’s Baa2 bond and issuer ratings on review for downgrade. Although the downgrade would not make South Africa’s bonds and issuer ratings junk, the ratings would go to a Baa3, one step above junk.

Moody’s said that the review was prompted by South Africa’s medium term prospects.

“The decision to place the ratings on review was prompted by the continuing rise in risks to the country’s medium-term economic prospects and to its fiscal strength, notwithstanding the tighter fiscal stance undertaken in the 2016/17 budget.”

If Moody’s does decide to downgrade South Africa, it will put the country one step closer to a junk country and virtually render it a junk nation. This will have a considerable impact on the economics of the country. Professional investors, including hedge fund, pension fund, and asset managers have a policy against investing in countries that carry a junk status.

The ratings downgrade watch allows Moody’s to do an assessment to determine whether or not government policies will stabilize the economy and restore its fiscal strength. With heightened domestic and international market volatility a factor in the problems that South Africa is having, Moody’s cited South Africa’s weak economic performance as an additional factor in the negative economic outlook for the country.

“The first driver for the review is to allow Moody’s to assess to the likelihood that the decline in South Africa’s economic strength will be reversed over the medium term.”

As previously reported in Inquisitr, South Africa is expected to have weak economic prospects for both 2016 and 2017. Because of government economic policies like Black Economic Empowerment (BEE), white South Africans have been excluded from the job market, further compounding the problem of unemployment in South Africa. FocusEconomics previously released the report indicating the bleak economic outlook for the country. President Jacob Zuma and the ANC dominated government have failed to slow the economic skid.

The Times Live reported the economic prospects for the average South African. They explained that if South Africa were a person who had income, debt obligations and a budget to repay those debts, the person’s salary would be going down and the cost of the debt would be rising. One of the factors that has hurt South Africa is that because of a weak global economy, raw materials produced by South Africa aren’t being purchased. Another factor is that the government isn’t receiving as much in taxes because of low economic activity.

Moody’s also predicted that the economic growth of South Africa will slow to a crawl and will only grow about 0.5 percent in 2016. Several factors have affected the growth and include strained labor relations, government policy uncertainty related to certain sectors of the economy, the global economy and a huge wage bill. The result for South Africans if its credit rating is downgraded is that there will be more inflation, the cost of goods and services will go up, interest rates will be higher, and the Rand will weaken further.

Although Finance Minister Pravin Gordhan’s 2016 budget could help with the problems, it will not be a quick fix for South Africa. Government plans in the budget currently include borrowing less over the medium term and reining in spending while increasing the country’s ability to pay off its debt.

[Photo by Pool/Getty Images]

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