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A War of Nerves 5

The last few months, gentle reader, have seen some seismic macroeconomic activities,
which had – and continues to have – a direct impact on South Africa’s equities.
In reverse-chronological order, the trio of ratings agencies’ decision to maintain our
rating one notch above sub-investment grade (Standard & Poor’s BBB– Negative,
Moody’s Baa2 Negative and Fitch BBB– Stable) means that:
• we narrowly dodged a bullet;
• our country’s creditworthiness is judged to still be sound; and
• we are still viewed as having the ability to repay our loans (both principal and
interest portions).

Overseas money such as pension funds, wealth funds and sovereign (or state-owned)
investors looking for a home will watch these ratings with anticipation, and use it as the
sole benchmark when determining South Africa’s suitability for investment. They may
have no choice if their funds have a mandate that dictates that the credit rating be
adhered to for investment purposes.

If we had been downgraded to sub-investment grade – or ‘junk’ – it would simply mean
that the funding required to plug the shortfall between government’s income (through
taxes) and planned expenditure would have to be obtained at far more punitive
interest rates.

For you and I, this would mean a possible rate hike by our central bank – the South
African Reserve Bank – which would mean an increase in the cost of living because
every loan we have – be it our car loan, home loan, unsecured loan, etc. – would cost
a great deal more, and this – coupled with forecasted low economic growth – would
mean less and less discretionary money left at the end of the month for you and I to
save and invest.

Unit trusts and Exchange Traded Funds (ETF) debit orders would be suspended – if not
altogether cancelled. Dips into the stock market would become less and less frequent
as we try and protect our ability to meet our month-to-month obligations; and, in the
long run, may dissuade us from climbing in at a time when the share price of strong,
dependable, listed companies could prove quite attractive.

The French Drop
This brings us to Brexit. It showed the strength of democracy at its strongest, with the
people deciding the country’s future, and its appointed leaders having their mandate
determined by the will of the people.
Figure 15 shows the drop in value of the JSE’s All-Share Index for a full week after the
result of the referendum was released.

5 Headings refer to relevant movie titles.

44 QUARTERLY ECONOMIC BULLETIN 2016