So how close are you to a downgrade?

S&P Global Ratings downgraded South African local currency debt to “junk” territory on Friday, citing a further deterioration in the country’s economic outlook and public finances, sending the rand tumbling.

Essentially the downgrade points to the risk investors face when lending money to South Africa. Our economic weakness questions our ability to repay the loans we make.

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Not much the man in the street can do about it. We rely on our finance authorities to navigate a way back to being upgraded. In my opinion we should have been more focused on improving things to avoid the downgrade instead of now having to dig our way out of it.

So how would stand up to a review?
In a very similar way banks and money lenders assess our ability to pay back debt. Income, (which is our personal GDP), is measured against our exposure to debt (credit cards, cars, personal loans, mortgages etc…). The higher the cost of debt the more risk you present to the institution.

Avoid your own personal downgrade.
Take action by assessing what you own credit rating is. There are many credit bureaus which offer a free assessment for you. Once you know where you stand you can make a plan to improve your situation.
Step one
Stop going further into debt.
It is a great opportunity in the current weak economic environment to payoff debt as the high cost of interest offers higher returns than other asset classes. Where can you, for example, get a solid return of 24% which is being charged on your credit card.
Step two
Rank your various debts by the interest rate you are paying. Target the higher one first and then use the savings to payoff the next highest.
Step three
Look for opportunities to be less dependent on debt. This will be found in working realistically on your spending habits. If the cost of your debt is above 30% of your income then you are living above your means. (SA’s debt is currently 60% of GDP). It’s better to earn interest than to pay it. So after your debt has been settled invest the money you so readily paid the bank and save it for yourself.

Easier said than done. South Africa has a long hard road ahead to work its way towards an upgrade. Getting yourself back to a healthy status will be just as hard. It is a problem than doesn’t get better until you take charge and turn it around.

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