What South Africa's junk status really means for SA and Africa

South Africa risks sliding into recession before the end of the year, thanks to President Jacob Zuma’s disruptive cabinet reshuffle last week which saw the widely respected finance Minister Pravin Gordhan shown the door.

Following the ‘cabinet massacre’ rating agency, Standard and Poor’s Global (S&P) downgraded South Africa’s economy to junk status citing political and institutional uncertainty.

S&P also expressed concern over government debt, and in particular the expense of supporting the state energy firm Eskom.

All what is left now is for another big rating agencies to rubber stamp S&P ruling and downgrade South Africa’s economy to BB+ before it actually has a material effect on the country’s debt and bonds.

Matters have been complicated more after the new finance minister, Malusi Gigaba revealed to the media that that he had been informed of the move to downgraded SA to junk status on Friday, three days before the downgrade took place but he did not announce the same to the public in order to calm down the markets.

In a nutshell, rating affects the amount that companies and governments are charged to borrow money, the higher the risk the higher the interest rate and therefore a downgrade of the currency means it is more expensive for South Africa to borrow money on the international markets, as lending to the country would be seen as riskier.

Since the cabinet reshuffle the rand has tumbled down to an all-time low and analysts are expecting it to suffer a series of downgrades.

As a result, inflation and living standards are expected to go up, ordinary South Africans will seek loans will be forced to pay loans at double interest rates of what they are currently charging.

Mortgage repayments will go up, credits repayments will go up and with it comes high rate of defaulting.

South Africa Imports a lot of foodstuff and fuel and therefore all these will go up because the rand is weaker keeping in mind imports goods are priced in dollars.

As inflation continues to shoots up, companies will buckled under pressure and likely to start laying off workers, which means unemployment rate which is currently at all-time high of 27 per cent will go even higher.

South African neighboring countries will not be spared either and are likely to suffer from knock on effect of the junk status.

South Africa is part of what you called a custom union, a type of trade block which is composed of a free trade area with a common external tariff. Smaller countries such as Swaziland and Lesotho depend on SA contribution to fund a big chunk of their economy therefore when South Africa slides into recession they too will slide into recession.

Countries which also use South Africa’s rand like Zimbabwe, which has adopted a multi-currency system, would also be affected by the recession.

Lastly the junk status will also have political effects, with Job losses frustrations are but imminent and with it xenophobic attacks is going to rear its ugly head again.

In a nutshell South Africa must brace itself for hard times ahead full of sacrifices and pain as it joins the BB+ status club comprising countries like Brazil, Greece and Iraq.