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Monday Dec 04, 2017

What junk status means for property owners

In simple terms, credit will start to cost more. This is because junk status means the government will need to pay more to borrow money, and this will ultimately have a knock-on effect on the consumer.

"Banks will need to hold more money in reserve, which will make it more difficult to obtain credit, and the credit that is granted will come at a higher cost, says Re/Max's Adrian Goslett."

"A marginal mitigating factor is that to some degree financial institutions have already made provision and priced in the effects of a downgrade on credit costs."

Goslett says downgrades also scare away foreign investment as the country will be perceived as far too risky.

"If demand from foreign investors dwindles, the prices of assets will depreciate, along with the currency. A fall in the rand will increase inflation and place pressure on interest rates, as well as the cost of imported goods.

"The result is that the country will be in a Catch 22 situation struggling to claw its way back out of junk status. It is far easier to maintain an investment status than it is to improve the status once downgraded."

Citing research conducted by Rand Merchant Bank, Goslett says, it takes approximately seven to eight years for a country to recover from a downgrade.

Further downgrades based on a worsening economic climate and continuing poor government fiscal performance could very well see rising long-interest rates - such as government bonds of 10 years - rise, Erwin Rode of Rode & Associated says. This would make it more expensive for the government and other state entities to borrow - in a time when finances are tight.

"A further effect could be that shorter rates will also rise as international investment funds start repatriating funds. These factors will dampen growth in the economy. Another possibility is that the National Treasury will be forced to approach the IMF for a bailout, which would be on stringent fiscal terms. This would also slow growth."

Independent Property
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