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The Positives about South Africa's Junk Status

These are some interesting times we currently find ourselves in. 2020 has thrown so much at the world, especially South Africa. Adding to woes of the COVID-19 reports and the announcement of a national lockdown, South Africa’s sovereign credit rating was downgraded to ‘Junk’ status on Friday 24 March 2020 by Moody’s. As one would expect, the media went into a frenzy and painted a very dark picture for the South African economy.

However, we at Funding Connection strongly believe that there are still educated reasons to be positive, something the media will not talk about, as positivity does not sell news articles. Let’s look carefully at the definition of ‘junk’ status and see what this means for us.

Junk Status – What Does it Mean?

Credit ratings are a measure of the ‘creditworthiness’ of a country’s government. In other words, it measures the likelihood of a country to repay its loans. Credit ratings are important, as it influences the cost of borrowing. If a country’s government is unlikely be able to pay back a loan, then the cost of borrowing or interest rates increase in order to compensate the borrower for the higher risk.

This is exactly how our local banks measure our creditworthiness when we go to the bank asking for a loan. If we have a history of defaulting on loans or debts that still need to be paid, then our likelihood of paying back the loan is low and thus the bank charges a higher interest rate.

What are the Reasons to be Positive?

Our credit ratings downgrade to ‘junk’ status has had an effect on the Rand/US Dollar exchange rate. The Rand has weakened against the Dollar to a record high of R18 to the US$. However, this is great for local exporters, as they trade in US$ and therefore, earn higher revenues when selling their goods/services. It also means that South African goods/services are now relatively cheaper in the global market, increasing global demand for our cheaper goods/services, bringing in even more sales for our exporters. The opportunity has presented itself to those of you that wish to start-up an exporting business.

Regarding funding opportunities in South Africa, something we are concerned about at Funding Connection, ‘junk’ status credit rating has had little effect on the willingness of state funding institutions to provide funding. You can still approach state funding institutions with your start-up or expansion proposals and if you meet all the requirements you will get the funding you need for your business.

If are able to start and grow a business during an economic downturn, then your business is going to thrive exponentially during the good times. It also means that if another downturn appears then your business will likely to ride it out without much hassle. Your business will be recession-proof!

The Bottom Line:

We tend to get wrapped up in the negativity and drama that is projected by news media and social media posts. Our hysteria is what blinds us to the good things that are still out there and thus diverting us away from exciting opportunities. Don’t let this piece of bad news stop you from working towards your dreams. Come rain or shine, Funding Connection is here to help you attain your business start-up or expansion dreams.

Written by Stephen Thring (MSS Economics; Project Manager at Funding Connection)

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