To some or even most car owners, the smallest increase in fuel prices may just seem like the economic norm. Maybe it’s because South African citizens have become too comfortable living with the condition of the country’s economic climate – adding the additional interest of ‘junk status’ to their monthly budget.
We may not be feeling South Africa’s economic transition into junk status; however, with consistent spikes in various monthly expense categories such as fuel, food, house maintenance, vehicle servicing, etc., it is important to be aware of how junk status can affect our pocket and adjust our monthly spend on vital expenses.
If you’re unaware about the term ‘junk status’, here’s what it’s all about:
Firstly, did you know that ‘junk status’ is actually another term used for the original term ‘high-yield bond’? Research states that junk status is therefore a bond that is rated below investment grade.
If a country holds debt – like South Africa – it will be subject to risks such as:
- Interest rate risk
- Credit risk
- Currency risk
- Market risk
- Taxation adjustment risk
- Reinvestment risk
- Inflationary risk
- Political risk
- Liquidity risk
- Streaming income risk
- Repayment of principal risk
- Maturity risk
- Convexity risk
- Default risk
- Duration risk
The risk involved in a country’s downgrade to junk status is ‘credit risk’, which is essentially the loss upon a credit event. Here, the country bound to another by contract or legal procedure, failed to make a scheduled payment, the bond is restructured or files for bankruptcy. A country is also at credit risk once credit rating agencies – Fitch Ratings, Moody’s, or Standard & Poors – issues a change in the credit quality of that country.
So, how does it work?
Getting stamped with the economic nightmare of junk status is not as simple as it sounds. It takes quite a lot for credit rating agencies to finally say enough is enough! Whether you believe it or not, countries dwelling under the caption ‘junk status’, have actually brought it upon themselves and citizens have to suffer the brunt of its consequences.
- A credit rating agency tries to describe the risk with a credit rating; such as AAA, AA, A, BBB, BB, B, CCC, CC, C.
- D is used as an additional rating for debt currently in arrears.
- Zero-risk ratings are above AAA – generally considered for government bonds and government-sponsored enterprises.
- AA and A may be subdivided into AA- or AA+.
- BBB- and higher rated bonds include ‘investment grade bonds’. Any bond rated lower are called ‘speculative grade bonds’ or ‘junk bonds’ – or what we famously know as ‘junk status’.
CarZar shows you how credit ratings are measured:
Infographic by BusinessTech
But, why the ‘junk’ experience for South Africa?
In layman’s terms, South Africa borrows money every month to help pay its bills. A downgrade to junk status essentially means that the likelihood of debt in foreign currency being repaid is very low. With South Africa failing to pay back its debts, it didn’t come to much of a surprise when Standard & Poor’s (S&P), and Moody’s disrupted the South African economy by:
- Downgrading the country’s foreign currency rating to BB+
- Downgrading the local currency debt to BBB-
Infographic by BusinessTech
Stuck with a vehicle, a costly fuel budget, high interest rates on car financing, expensive car insurance, and wondering why? CarZar has the answer for you!
Infographic by junkstatusabsa
Junk status and car financing
If your car is being financed, lenders are most likely worst nightmare in an economy of junk status. One can expect an increase in the risk premium, as lenders wouldn’t hold back on driving up interest rates due to a perceived ‘greater risk’ in default.
Higher interest rates increases the cost of families paying for loans from banks – financing things like home loans and vehicle finance payments.
With interest rates rising‚ the cost of borrowing will definitely rise along with it – increasing your credit card repayments and the amount you need to pay the bank every month for your short-term loan.
Junk status and car insurance
The downgrade by Standard and Poor’s, and Fitch Ratings, is expected to hit the short-term insurance industry in particular. According to CarZar.co.za MD, Fernando Pinheiro, “The downgrade will increase the overall cost of foreign capital for South African entities, due to high interest rates and strong devalued currency. Therefore, financial institutions will have to transfer these costs to the market, by increasing the base interest rates. Junk status will impact the entire auto-trade industry, from spare part costs to insurance premium of most vehicles, especially the imported ones. If your current insurance contract is about to expire, you may see a substantial increase in the monthly premium,”.
Along with this increase in the overall cost of foreign capital, the cost of imported motor parts will take leap; resulting in increased repair costs, followed by growing premiums for policyholders, according to the South African Insurance Association (SAIA) Chief Executive, Viviene Pearson.
Junk status and petrol
With junk status resulting in the weakening of the South African Rand (ZAR), let’s face it, the rise of petrol prices were definitely imminent. The raw ingredient of petrol is oil, which have also taken a hit against SA’s junk status. With oil bought in dollars, it’s quite obvious that the weakening of the South African Rand (ZAR) would experience a rise the cost of fuel and thus petrols costs.
The knock-on effect? Higher transport costs! Higher transport costs affect the price of everything moved by trucks – from food to imported goods, and anything you buy at a shop.
How to get the ‘junk’ out of your trunk:
Getting out of junk status is not easy. Most of the time, it’s basically impossible. According to Bloomberg, over the past 30 years, only 6 out of 20 countries that have fallen into junk status have managed to reverse their way out of it.
Time taken for those who re-acquired an investment grade rating, ranges between 13-months and 11-years – the average time being 7-years.
Infographic by Rippah Australia
South Africa’s long walk to junk status freedom…
According to national policy documents released by the African National Congress (ANC) ahead of its National Policy Conference held from 30th of June until the 5th of July 2017, here are the proposed solutions required for South Africa’s ‘get out of junk status’ card:
- Increasing the investment by the private and public sectors from current levels of around 19% of GDP to 30% of GDP. Key to this is policy certainty.
- Eliminating policy uncertainties and unwarranted regulatory hurdles.
- Conducting an audit of the policy and regulatory constraints to investment and set a clear timeframe for addressing them, linked to Ministers’ performance contracts.
- Creating confidence in the economy through credible employment programmes and racial transformation.
- Good governance of state owned enterprises.
- Maintaining international norms and standard with regard to the regulation of the financial sector and other sectors.
- Strengthening social justice and conditions for the poor and working class.
- Building confidence – improving the quality of public education and health services.
- Private sector regulated to avoid unfair competition, price-fixing and unfair labour practices.
- Systems in place to expose corrupt practices and prevent corruption from taking root.
- Improving integration into the African economy – enlarge the free trade areas (FTAs) existing in the Southern Africa Development Community and other regional economic communities into larger more expansive FTAs.
- Growth-enhancing elements, such as, reduced red-tape, increased investor confidence, the limiting of monopolistic practices and structures and policy certainty in key areas regarded as necessary components of South Africa’s overall transformation programme.
- Lowering costs in the economy to make employment less costly and to assist poor households.
- Improved energy generation and distribution.
- Improved urban planning approval processes.
- Improved water supply and waste water management.
- Improved transport and logistics.
- Improved access to telecommunications services.
- Improved processes for water, minerals and environmental permits.
- Strengthen the public sector – economic institutions for the purposes of development.
- Appointmenting capable and professional public servants with the ability to deal with the complex and integrative questions that emerge from the perspective of managing a developing and transforming economy; continuous identification of market-conforming tools or incentives that drive particular development outcomes.
- The democratic state and state owned companies must be fully empowered to drive large-scale infrastructure investments and expand access to public services.
- Instituting improved governance at State Owned Companies, such as, SAA, Land Bank, Eskom, Transnet, etc.
- Ensuring renewed discipline in the development and implementation of economic policy. There has been a degree of drift and indiscipline in policy formulation and policy implementation, such tendency needs to come to an end.
- Showing greater co-ordination and unity of purpose among key government departments and actors, so that the developmental state is able to shape the country’s national agenda.
Although you cannot appeal to junk status, CarZar provides motorists with THREE simple ways to fight Junk Status:
- Maintain a Healthy Credit Record Costs are rising right in front of our faces. We see it everyday when we think, “Wasn’t that R10 less the other day?” The simple solution is to downgrade your vehicle for a more affordable one – before you fall into arrears or have to make large bank loans. Cars may seem like a status symbol, but having a perfect credit record is much more important.
- Live a Debt-Free Life You’re probably thinking, “That’s impossible!” Well actually, it’s really not. A good starting point to getting en-route to a debt-free life would be to pay-off your loans and credit cards, and then don’t forget to avoid creating new debt… Close those credit accounts. If you’ve got other expenses to pay, take the unnecessary ones off your budget list – Car installments, grocery lists, insurance premiums and fuel are vital; but luxury spendings are not.
- Sell your Car to SA’s Most-Convenient Car Buying Service Be money wise. For those who feel unconfident about selling a car in a country deemed as ‘Junk Status’, online car buying service, CarZar, empowers consumers to sell their car seamlessly, in only 30-minutes! All you need to do is go to CarZar.co.za, enter your car details and receive a free instant online quote. If happy, you can book a free inspection at any one of CarZar’s most convenient Car Buying Centres in Cape Town, Johannesburg or Durban; or CarZar’s expert vehicle Inspectors can come to your preferred location! Here you’ll receive a fair and reliable cash offer. If you accept their final cash offer at your obligation-free inspection, instant payment is made into your account!
Would this be the right time to sell your car?
“With the country being downgraded to junk status, owning a car is expected to become more expensive and depending on the impact of higher costs, more people may decide to sell their vehicles,” says Pinheiro.
If you choose to sell your car to CarZar, you will receive instant payment into your account. In just 30 minutes, your car will be sold. CarZar purchases financed vehicles and gives you cash for your car.
Sell your car to CarZar in 3 quick and easy steps:
STEP 1: Select your car details and receive your online quote instantly.
STEP 2: Book an obligation-free inspection at any one of our Car Buying Centres in Cape Town or Johannesburg; or at your preferred location in Cape Town, Johannesburg, Durban or Port Elizabeth.
STEP 3: Accept our final cash offer and receive instant payment!
Or, send a WhatsApp message with the word “Quote” to 087 470 0436 and receive a free quote for your car.
We also purchase financed cars and take care of all the paperwork for you.
With CarZar, you can sell your car in 30 minutes!
GET A FREE QUOTE