Credit rating of a country is mainly the ability of a country to repay the loans that it borrows both domestically and from other countries. It is mainly determined by the economic conditions that are prevailing in the country at a certain time. There are other factors that affect the credit rating of a country. This research paper will evaluate the credit rating of South Africa. The research will evaluate the cause of the current credit rating of South Africa and its effects to the country in various sectors of the economy (KRUGMAN, 2009).
South Africa is a country that has a very good economic growth. This is caused by the fact that the country is developed in terms of infrastructure hence trade is good in the country. There are various minerals that are mined in the country and hence the country gets a lot of foreign exchange from the sale of the minerals (WONG, 2012). In addition, there are very many natural resources that are behind the economic growth of the country. In terms of technology, South Africa is doing the best as compared to other countries in Africa. It is currently the biggest producer and supplier of electricity in the region. The country also has many companies that are performing excellently.
The political environment of South Africa is excellent. The country is involved in international world activities. It creates good relationships with other countries as a way of encouraging trade with other countries. It encourages competition with traders from other countries as a way of motivating economic development. The political system also puts down policies that are meant to encourage economic growth. Generally, the political environment for South Africa has been attractive and this has attracted foreign investors in the country.
The legal environment of South Africa is well developed to the level similar to that of first class countries. There are laws that are in place to facilitate trade in the country. The laws ensure fair competition in the country as well as encouraging international trade. This has encouraged creation of businesses and the competition in the country is healthy (NTERNATIONAL MONETARY FUND, 2011). The creation of businesses and investments has created jobs to the citizens of the country.
The credit rating of South Africa has been positive for a long period of time. This has been attributed to the good political, economic, technological and legal environment that has prevailed in this country for a long time. However, the credit rating of the country has been said to be negative recently. There are several reasons that have been attached for this occurrence.
Recently, the economic growth of the country has greatly reduced. This is mainly due to the fact that there has been a financial crisis in the world that has affected the country greatly. The inflation rates have increasing therefore hindering the investments in the country. This has led to a decline in the gross domestic product of the country as compared to the previous years. This low economic growth rate has also led to high unemployment levels since there are no investments in the country facilitating employment. Due to the high inflation rates, workers in the country have been demanding for increased wages and these conflicts have threatened the production in the country. All these problems are expected to persist and therefore the credit rating of the country is expected to be negative further.
The other factor that has fueled the negative credit rating of South Africa is the political noise in the country. There are arguments that the political noise has increased in the country and this plays a great role in discouraging investment in the country both domestic and foreign. However, some people in the country argue that the noise is normal for a democratic country. This is not true because the arguments are very clear whereby there are disagreements on whether the mining companies should be nationalized or not. These political noises are likely to lead to a situation whereby the country is not able to manage the deficit budget well and these predictions have facilitated the negative credit rating of the country.
The deficit budget that South Africa has prepared recently has facilitated the negative credit rating of the country. In the first place, the country is expected to continue running a deficit budget in the near future considering the economic conditions in the country. Considering that the gross domestic product of the country has been declining, and then it means that the government cannot fund its expenditure (KRUGMAN, 2009). In addition, it is predicted that the country is likely to spend most of the borrowed funds in solving social problems in the country such as unemployment and wage crisis in the country. Therefore the problems that the country is facing are not likely to be solved in the near future. The country is therefore expected to continue borrowing from other countries for the next periods of time as a way of financing its deficit budget. This has facilitated the negative credit rating.
European countries are also facing financial crisis. South Africa exports most of its products to these countries and therefore it is predicted that the sale of the South African products in the European countries is likely to decrease greatly. This has a negative effect on the economy of the country since it will mean reduced foreign exchange in the country. As a result, South Africa will face problems will face challenges financing its budget. This means that the country will continue to depend highly on foreign countries to fund its budget.
The move to nationalize many firms in South Africa has also played a role in the negative credit rating of the country. It has been agreed that various firms and mining companies be nationalized. This has created fear among the investors in the country. Many of them fear that their investments may end up being nationalized and therefore are deciding not to invest in the country and this is reducing the gross domestic product and has increased unemployment in the country.
The electric shortage in South Africa has facilitated the negative credit rating. The economy of the country has expanded to a great extent hence many industries have been created and firms. This has caused electricity shortage in the country whereby rationing has been observed. The country has borrowed huge sums of money to finance the generation of electricity in the country. Considering the current economic challenges facing the new firms currently, it shows that the country will not be able to repay this loan from the taxes paid by the firms. Generally, there are various factors that have facilitated the negative credit rating of South Africa from standard credit rating (JONSSON, 1999). They include political, economic, and social factors. Considering the current conditions in the country, it is predicted that the situation may persist for a long period of time.
The credit rating agencies have used various indicators in declaring the negative credit rating of South Africa. In the first place, the financial statements of the mining industries owned by the government and other corporations have shown that there has been a decline in prices of minerals like platinum. This has resulted in low profits for these corporations. This means that the government will not be able to collect enough revenues and taxes from these corporations to enable it pay its current sovereign debts (CHRISTENSEN, 2009). This situation has made the agencies to indicate a negative credit rating.
The expenditure of the country has also risen from 0.73 percent to 0. 9 percent of gross domestic product from 2009 (CHOUDHRY, 2011). This shows a high growth of expenditure that is not matched with an increasing gross domestic product. This means that the government will not be able to pay its public debt considering the fact that the expenditure is increasing. Therefore there is a risk that the South African government will not be in a position to meet its public borrowing. This is a good indicator of poor credit rating of the country.
The agencies have also evaluated the declining exports of the country and specifically high technology products. In the first place, data has shown that the exports of the country have declined from 7 percent to 5.6 from the year 2000. Declining exports means that the country is not generating enough foreign currency to enable it meet its sovereign debt payments. This situation is expected to worsen considering that many of the countries that South Africa trades with are facing financial crisis (FINE, 2011). This therefore means that they are not in a position to import many products from South Africa.
It will also be noted that South Africa has borrowed a lot of money from foreign countries. This is through the issue of government bonds. This huge foreign debt means that the country will face problems in paying the debts in future. Furthermore it means that the South African government is not worthy being given another debt. The huge size of its foreign and internal debts is a good indicator of negative credit rating of the country. Another indicator that the agencies have been using is the high deficit budget that the South African government has been running. This deficit budget has always been financed by borrowing. The economic performance of the country has still remained poor due to the fact that the unemployment level has remained high. Therefore there is a prediction that the South African government will continue borrowing funds to finance its deficit budget. Therefore this is another indicator used by the agencies.
The high inflation rates in the country have also demonstrated poor credit rating. When the inflation is high, this is discouraging investment in the country and therefore the gross domestic product of the country is expected to decline. With declining gross domestic product, the country will not be able to meet its obligations of paying its foreign debt as well as meet its planned expenditures.
Economic growth of South Africa has been declining. The rate decreased from 2.7 percent to 3.1 percent. This decline is caused by various economic problems that South Africa is facing. Considering that the country owes many funds in form of debts; the country has a negative credit rating since the declining economic growth means that the country cannot repay its current public debt (OCHNICK, 2009).
In summary, there are enough indicators to prove that the credit rating of South Africa is negative. Even though the country has the potential of growing positively due to the natural resources it is endowed with, it is clear that the country is facing a problem (MICHALOWSKI, 2011). It can be proved that the future of South African cannot be easily predicted considering the fact that it has a huge public debt and the situation is not expected to change considering the economic conditions.
Section 2.
The negative credit rating of South African economy has adverse effect on the economy of the country. In the first place, the other countries will not be willing to lend any funds to the country anymore. In addition, nobody will be willing to invest in the bonds of the South African government. Therefore the government will not be able to acquire the necessary funds to finance its planned expenditure (DEACON, 2004). Considering that the government is preparing deficit budgets, it means that the government will face difficulties in running its daily activities due to shortage of funds.
The other effect of the negative credit rating is a bad relationship between South Africa and other countries. Considering the fact that South Africa already owes other countries huge sums of money, it means that there will be conflicts with other countries when it fails to repay the amounts owed (CLARKE, 2007). The country will also have negative relationship with other countries when it finds out that the other countries are not willing to provide funds to South Africa. Generally, the negative credit rating of South African will cause poor relationships with other countries.
Unemployment levels in South Africa are likely to increase with the current situation. Considering that the government will not be able to access funds to carry out expansionary policies, then there will be an increase in the unemployment levels in the country. Furthermore, the economic conditions are discouraging investments in South Africa. This means that there will be fewer firms to employ the citizens of the country. Considering that many of the citizens have many loans that they are not able to repay, then the demand for the consumer goods is likely to fall when they cut down their expenditure. Therefore many firms will not be willing to produce due to the low level of demand for their products. In addition, many companies in the country have huge loans and therefore they are almost becoming bankrupt. When these firms close down, more people will become unemployed. Generally, the results of the negative credit rating of South Africa are that the unemployment levels in the country are likely to increase.
The economic growth of South Africa is likely to decline further considering the negative credit rating of the country. With no expansionary policies due to limited borrowing, then there is no likelihood of economic growth (SWART, 2012). The fear created to the investors is likely to cause a decline in investments in South Africa and therefore the output is likely to decline in the country due to reduced investment. Generally, reduced government expenditure due to lack of loans to finance deficits and the reduced investment is likely to reduce the output of the country and hence the economic growth is likely to slow down further in the future.
The education is likely to be affected negatively in South Africa with the negative credit rating. Many loans have been issued to students pursuing their education. These programs have been supported by the government to a large extent. Therefore with the poor credit rating of the citizens of the country, the banks will not be willing to give loans to the students due to the fact that many of the loans are currently unpaid (KRUGMAN, 2009). The financial institutions will now be evaluating the credit worthiness of people before issuing any loans. Since most of the people are not creditworthy, it means that most of the people will not be able to access higher education due to lack of loans to assist them meet their fees payments. This is likely to affect the education standards of the country negatively.
The interest rates are likely to remain high in the country. This is considering the fact that there will be a shortage of funds to lend and the amount of people willing to borrow loans will be many. This means that the costs of accessing loans will be very high. The results will be that the consumption level in the country will reduce because the costs of borrowing to consume will be high. The high interest rates will hinder investments in the country because high interest rates mean high costs of borrowing. Simply, the negative effects of high interest rates will be witnessed in the country due to the poor credit rating of the country.
Inflation levels are to increase with the current situation and the negative effects of inflation will be witnessed. In the first place, the living standards of the people in South Africa will lower. This is due to the fact that the high interest rates will mean that the price of the goods in the country will be high (WONG, 2012). In addition, the low output due to low investments in the country means shortage of goods in the country that will lead to high prices of the goods in the country. The high prices that will strike the country due to inflation will mean that the standards of living of the people in South Africa will be very low.
The exports of South Africa are likely to decline to a great extent due to the poor credit rating. The decline in the investment and production in the country means that the country will not be able to produce enough for domestic and export purposes (SWART, 2012). What the country will produce will be consumed domestically and therefore the volume of the country’s exports will decline.
Generally, the credit rating of South Africa has been reported to be negative and it has resulted to adverse effects in the country’s economy. There are many reasons attached to the situation such as political, economic and social problems. The negative credit rating of south is predicted to lead to many negative impacts to the economy of South Africa (JANTSCHER, 2012). The situation is likely to lead to further unemployment, high inflation, reduced economic growth, poor relationships with other countries and low standards of living in the country. It is true that the South African economy is endowed with various natural resources such as minerals. The country has a good legal system to facilitate economic growth. In addition, the country has a good technological advancements that can facilitate its
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