Even before Moody’s put South Africa on notice for a downgrade on March 9, analysts had been weighing in on the possible consequences for the South African economy.

What does the future hold for South Africa? Is junk-status still on the cards, and if so, what will the impact be on businesses and individuals?

Junk not an ‘if’, but a ‘when’

According to IG’s market analyst Shaun Murison, it would be incredibly surprising if South Africa were to avert junk status when rating reviews are submitted this June. But Murison as well as PSG Asset Management’s head of fixed income, Ian Scott, have both confirmed that possible downgrade risks have already been factored into most yields for fixed-income assets – a strategy which may circumvent some of our losses.

Frans Conradie from NKC African Economics has also stated that a sovereign-risk ratings downgrade would not be such a massive deal as most investors afraid of a downgrade have already withdrawn following South Africa’s precarious economic position at the end of 2015.

The opinion seems to be that junk status will not have as critical impact on the South African market as previously believed, with investment and portfolio managers changing up their strategies to better cushion the blow in the all-important bond market.

Despite these slightly more optimistic outlooks, however, the general bigger picture does not look rosy, as the effects of a downgrade compounded by the countrywide drought seem likely to confine South Africa to the a path of slow growth and even slower recovery.

On Politics, drought and debt

The political agenda

One of the greatest concerns seems to be the political upheaval surrounding the municipal elections. Analysts foresee possible wage increase demands in the civil service, which they believe government will most likely agree to in trying to win votes for the respective parties before the elections.

In addition, George Nicholls, senior managing director at Control Risks Southern Africa, has cited state-institution corruption as  one of the greatest political issues for commercial operations. Although battles between the courts and the government have proven that the judiciary is capable of withstanding political interference, the conclusion of such battles has notoriously not done much more than point out obvious culprits in the system. There’s a glaring disconnect between trial and punishment, and it seems highly unlikely that corrupt officials will stand accountable or offer restitution for misdeeds.

This has led many investors to reconsider investment in South Africa as a system which is not accountable to its people will hardly fare better when addressing its investors.

The economy of drought

In addition to the uncertainty presented by the municipal elections, South Africa will also need to recover from the 2015/16 drought brought on by a particularly harsh El Nino.

Though much of the country has welcomed abundant rains in the last few weeks, citizens will need to understand the economic aftermath of this season’s poor harvests which will intensify before it eases up. According to Fin24, by January 2015 South African farmers were already R125bn in debt to the banks, a number which has grown significantly with extreme measures necessary to save livestock, crops and farmable land while maintaining operational costs.

As of March 2016, approximately 42,000 farmers had been assisted with drought relief although a total of 246,631 farmers had reported losses across eight provinces.  The knock-on effect of the widespread farming devastation is increased food prices, job losses in the farming industry, increased agricultural debt, financial bailouts by the state as well as environmental devastation.

South African debt

The last factor which South Africans will need to take into account when considering the state of the nation is the country’s debt.

The country’s budget, of course, is compiled by the Minister of Finance each year – with specific budgets allocated to different industries, infrastructures and social initiatives to aid the citizens of the country.

Though these bills would ideally be footed by income tax, it’s a highly unrealistic expectation – since taxes for all income groups would have to be raised to unviable levels to gain enough income. This means that SARS simply cannot cover the entire budget through taxes, compelling the government to seek financial aid elsewhere.

These governmental ‘loans’ are much like individual credit applications made at the bank, and just like individual applications countries have ‘credit ratings’ which determine how much interest they need to pay on this debt. A junk rating puts a country in the high risk category.

In South Africa’s case, the slow growth and job losses in the mining and farming industries in particular will already yield a lower tax income for the country, this means we will need to incur further debt at a higher rate brought on by the possible downgrade.

The sad reality is that all these factors will further prohibit South Africa from sufficient investment in crucial services such as education and health in addition to preventing minimum wage increases, which could lead to further market turmoil.

What is the answer?

Though analysts are positive that South Africa can recover from this financial crisis, the question remains how long such a recovery will take. It is estimated that most countries take around seven years to fully recover from junk classification.

Seven years is an awfully long time to wait out this storm – leading many investors and individuals to the conclusion that it’s probably safest to move their money offshore.

In December 2015, investment analyst for Sanlam Private Wealth, Renier de Bruyn, stated that their company has advocated for offshore investment since 2011 and that this is a trend that’s not likely to be reversed in the near future.

It’s hard to say for certain what the future holds for South Africa’s economy, but it’s clear that our recovery will most probably be laborious, slow and uncomfortable.

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