Implications for South Africa of Brazil's recent investment downgrade by Standard and Poor
Commenting on Standard and Poor's recent downgrade of Brazil's investment rating to 'junk' status, Professor Raymond Parsons says:
'It was not entirely unexpected that Standard and Poor would eventually downgrade Brazil's investment rating to 'junk' status, but it has come sooner than many analysts expected. A combination of factors has over time damaged Brazil's economy. Political troubles, escalating public debt, inflation, recession and lower international commodity prices have obviously taken a more severe toll on the Brazilian economy than originally anticipated.
As SA has now been grouped with Brazil in the so-called 'Fragile Five' of world economies, the strong message is that SA must now do all it can to avoid further credit rating downgrades. It raises the cost of borrowing all round and damages investment sentiment. Recent negative global economic developments have come when the SA economy is particularly vulnerable and have exposed weaknesses.
We must not wait for a financial crisis.These pressing economic circumstances confirm why the signals which Finance Minister Nene sends out in his mini-Budget next month about SA's public finances and growth prospects will greatly influence whether SA can avoid a worst-case scenario. The risk of further credit rating downgrades hangs like a Sword of Damocles over the forthcoming mini-Budget and its implications.'
Raymond Parsons is Professor of Economics at North-West University Business School, has served on the Board of the Reserve Bank of South Africa, and was formerly Deputy CEO of Business Unity South Africa.