The economics of our country affect us all, yet so many don’t know how or why. So I’ve decided to start a mini-blog-series to help with decoding all the jargon.
Ratings downgrade, currency depreciation a.k.a ‘falling rand’, recession – what does it all mean and why is it important to you?
Every day we are bombarded with new statistics of how the South African economy is failing. One shouldn’t need a financial advisor or economist to navigate the news, but if you feel like you do, here’s the low-down:
Let’s start with the latest buzz-word Recession (definition) every quarter, StatSA gathers data on how well each industry that feeds into our country’s income has performed and totals it all up to calculate our GDP (that’s gross domestic product for non-economists). If this GDP figure decreases for two quarters in a row, the country is then said to be in a technical recession. Ok, so what? A recession generally means that businesses are not performing well enough due to a lack of demand for their products and services, meaning they need to start cutting costs to remain profitable, and in some cases, even close down. So how does that affect the man on the street? Well, if the man on the street works in an industry that is really hard hit, he may lose his job.
So what about this Rating’s downgrade story? Basically, three of the world’s most well-known credit ratings agencies – Moody’s, Standard & Poor’s, and Fitch have made it their job to be the watch dogs of the international debt world. This means these three financial institutions are constantly monitoring each country’s ‘behaviour’ in an effort to determine a country’s ability to repay its international debt. An economy that is growing (i.e. increasing GDP), creating more jobs and has minimal political scandals is rated more favourably, hence the credit rating is better. This signals to the international community that if they invest in such a country, they would make their money back and more. The opposite situation however, scares international investors away, and there is not enough international money available to grow the local economy.
And this Currency Depreciation, who cares if ‘the rand is falling’? Well, every South African should, if you ask me. The value of our rand is determined by how much of something it can buy you. South Africa imports a lot of goods and services from outside the country (remember that “made in china” sticker on your clothes?), and the lower the value of the rand, the less you can buy. Ok, maybe we should just not buy anything from outside our borders and be self-sustaining then, right? Not quite. Imports and exports open up markets for local products that we would otherwise not use, so closing our doors to the world would shut down a lot of businesses whose main customers are international.
I hope this post has made the news less foggy for you, please leave any requests for finance and/or economics-related topics and I’ll answer to the best of my ability.
Featured image by Myofficemagazine