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South Africa’s economy has just been labelled ‘junk’. Here’s why

A dramatic, late-night cabinet reshuffle last week dealt a blow to South Africa’s reputation in the financial world

Last week, the financial world put a pretty harsh label on South Africa’s economy, with severe consequences for South Africans’ daily lives.

Two of the world’s biggest credit rating agencies, Standard & Poor’s and Fitch, gave it a BB-, also known as ‘junk status’ – described on their website as an economy that is “facing major ongoing uncertainties to adverse business, financial, and economic conditions.”

The first thing to make sense of is what a ‘credit rating’ actually is.

Agencies around the world set ratings for how confident people are feeling about lending money to different countries on the basis of how likely it is that the borrowing country would actually pay a lender back – it's a similar principal as your bank giving you a credit score, to judge whether you're 'safe' to lend to. They do this by looking at things like whether the government has been following up on its promises, and whether the country has been – i.e. producing more goods and services – lately.

South Africa’s credit rating has been downgraded to pretty much as low as it gets for a country that isn’t on the brink of going bankrupt. It’s called a ‘sub-investment grade’, and basically sends the message that international lenders should be more careful of lending the country money until things calm down.

Higher prices and less funding for public projects are just a few of the ways this will make life more difficult for South Africans.

The lower your credit rating, the higher the interest rate you get charged for a loan (if someone’s still willing to give you one.) That means if the South African government wants to borrow money to fund things like social welfare and education programmes, they’ll have to spend more on interest – taking money away from the budget for the actual project itself.

It’s also pretty damaging for the value of the rand, South Africa’s currency. Within a couple of days, it lost 10% of its value against the dollar – a speedy drop in the As soon as this happens, the price of imported products like smartphones, cars, and petrol goes up (if one dollar used to cost you 10 rand and now costs you 15 rand, you’ll need a lot more rand to buy the same thing.)

For South Africa, this really matters – it uses imported materials in a range of areas like manufacturing and retail - so a price increase has serious knock-on effects for people’s daily living costs.

But although the downgrade has real implications for people's day to day lives, it’s more of a symptom than a cause of the country’s problems.

This ‘junk status’ rating points to some much deeper issues in South Africa’s economy, and if these are not addressed, a reversal of the downgrade is very unlikely.

The downgrade was announced just after a dramatic, late-night reshuffle of the cabinet by President Jacob Zuma. Finance minister of Pravin Gordhan was replaced by minister of home affairs Malusi Gigaba.


Malusi Gigaba
Malusi Gigaba (left) Image: © David Parry/PA Archive/PA Images

A lot of people think this is because Gordhan was hesitant to commit the country to a nuclear power plant programme expected to cost at least US$72 billion – close to the total government budget for the entire year. Not only are there doubts about whether nuclear power is necessary in a country where there are other viable energy options, but there are concerns about who stands to benefit from the contracts related to the project. Gordhan was seen to be cautious of committing to the programme, and some say his replacement is more likely to ensure it happens.

The second problem South Africa is facing is that they don’t seem to be producing new goods and services as fast as they used to – in other words, the economy isn’t growing. Over one in four are unemployed, and people are concerned that the government hasn’t been able to create jobs, promote business, and address the seriously high inequality across the country.

More than two decades on from the end of apartheid, wealth remains largely in the pockets of the white minority, a legacy that is proving very hard to correct.

Land and business owners tend to be white, finding jobs is easier for whites, wages are substantially higher and prospects are generally a lot better for white South Africans than their black counterparts. The government is struggling to address these problems, and people’s patience is wearing thin.

Now, a motion of no confidence has been put in place against the president, which will be debated in parliament soon. The chances of it succeeding are slim; the ruling African National Congress has a significant majority in parliament, and the president has already survived a couple of attempts to unseat him.

As the country prepares for a general election in 2019, the battle over control of state resources will only intensify; but it’s citizens who are left to grapple with higher prices, job losses, and the poor prospects of an economy down in the dumps.

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