#JunkStatus Downgrade – Jacob Zuma’s impact on property and your finances

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Life in South Africa has just gotten more difficult thanks to President Jacob Zuma’s master plan to do a cabinet reshuffle to satisfy his own interests. South African bonds have officially been rated as “junk” by credit rating agency, S&P Global, due to Zuma’s mismanagement of state-owned companies and enterprises. This downgrade has been looming for some time now because of incompetent management of state owned assets by Zuma’s Gupta-aligned ministers. The firing of Pravin Gordhan has eradicated S&P’s last shred of confidence in governments policy and the forecast for the finances of every-day, hard-working South Africans is not good, as Moody’s and Fitch are sure to follow suit.

Cost of borrowing increases for indebted South Africans as government pays more on debt costs, which will also be passed onto you the taxpayer. Further effects on your finances will include a decline of the rand, higher inflation and a good possibility of an increase in interest rates. Subsequently, business confidence will also decline, leaving you with less to invest and spend. Just short of a week ago, the rand was placed at a three year high of R12.30 and is now sitting at R13.63 ‒ with further threats of more declines.

According to Francois Venter, Director at Jawitz, consumer and business confidence is already at a low level. “South Africa’s downgrade to junk status by S&P Global will put more pressure on the economy as a whole, sending it further into negative territory, with a natural ripple effect on the residential property market. Already, many South Africans are over indebted, and this latest development is likely to lead to further pressure on households in the short to medium term.”

Samuel Seeff of Seeff Properties says that “while disappointed at the news of the credit downgrade by the S&P ratings agency, the threat of a downgrade has been looming for the past 18 months”.

He adds that, “although the latest political and economic shifts have been negative, the downgrade has in many ways already been priced into the current trading markets.

“We therefore expect the property market to remain stable for the time being with any real effects only filtering through later in the year. That said, one cannot ignore that the actual realisation that ‘junk status’ sends a major blow to consumer confidence and will have a longer term negative impact on the economy and we again emphasise the need for political and economic stability. For now though, there is no need to panic and it is not all doom and gloom. We expect business as usual for the property market,” says Seeff.

According to John Loos of FNB, “the FNB House Price Index was just beginning begun to show some recovery, although still seeing negative house price growth in real terms (when adjusted for CPI inflation). This is not too surprising given signs of a moderate economic recovery in South Africa.

“The SARB Leading Indicator has been pointing upwards for some months, and the Barclays Manufacturing Purchasing Managers Index, a useful high frequency indicator of economic direction has also moved back into ‘expansionary’ territory in recent months. Global commodity prices are stronger, and domestically the drought conditions have alleviated,” he adds.

However, key risks to the economy, and thus the housing market, remain due to developments on the political front, notably last week’s removal of Minister of Finance Gordhan. This has exerted some pressure on the rand, and this of course is watched closely by the ratings agencies, sustaining the risk of ratings downgrades for South Africa.

“Should significant further pressure be exerted on capital flows out of South Africa, and as a result on the rand, the additional imported inflation pressures can lead to an unexpected resumption of interest rate hiking, which could curb residential demand and thus house price growth once more. That’s the risk scenario, however, with our most likely view that interest rates remain unchanged through 2017 and house price growth of near to the March level can be sustained,” says Loos.

High-end ANC officials, SACP and his opposition are saying this is the last straw and that Zuma must quit. Volatility does bring with it opportunities, however, as consumers having to service more debt costs means that more distressed properties will come onto the market. Cash buyers can therefore expect to negotiate major under-market value deals over this time.

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