If you are a South African citizen, you should brush up on your knowledge of the debt crisis in 2016. What is it? How will it affect the average South African?
A debt crisis is exactly what it says it is. There is an alarming situation regarding the debt of a specific people. South Africa is in a debt crisis. The credit market in South Africa is showing some frightening statistics and it is time to take hold of it before it becomes a bigger problem.
To lay a bit of a foundation, it is important to note that a healthy credit market plays an instrumental role in the growth of an economy. People and companies with good credit records are loaned money to finance projects and lifestyles that in turn creates growth in an economy. It is an explanation for another day but read this piece to understand how economies grow.
The 2016 finance news is forecasting that the interest rates will be raised again by the SARB in 2016.
Why is this a problem?
Well, If the interest rate rises it brings into effect a rise in the servicing of debt in South Africa. Many South Africans are already struggling financially and the added pressures of rising debt costs can wreak havoc on their budgets. The rate of default on debt will now most probably rise as well.
When an economy experiences an increase of default on debt it brings a double whammy of negative impacts.
Debt that went on to default turns into really bad investments to the lenders. This means that lenders have less money to loan out to other borrowers. The credit provider’s business value decreases which means investors are now less likely to invest in their businesses.
The second impact happens through the consumers. Consumers that default on debt will experience a decrease in their credit records. This means that they will be less likely to receive loans. This means that there will be less money spent in the economy by consumers which also leads to the decrease of an economy.
Lastly it should be noted that South Africa is on the brink of being downgraded to a junk status. This means that credit unions deem South Africa’s ability to repay credit not that high. If South Africa should receive a junk status rating it would cause many international investors to withdraw their investments from South Africa to invest it elsewhere. This will also decrease the value of the economy.
It's not over, until it's over.
All these factors pull together and bring into effect the debt crisis in our country. Fincheck is a firm believer that South Africa has the opportunities and the ability to ride out the storm and to reclaim the former levels of success. It will however require the whole of South Africa to achieve it through creating responsible spending habits and responsible lending practices.