How could South Africa’s recent downgrade to Junk status by rating agencies like Fitch and Standard & Poor’s (S&P) affect motorists?
In the short-term the effects on the average South African may not be much but the long term effects of being downgraded will lead to higher interest rates, making life more expensive than before.
Fernando Pinheiro, joint-MD of CarZar’s online car-buying tech-startup, believes that it may be a difficult time to have more than one car in a household, as the costs to maintain those vehicles are likely to increase due to the current downgrade of the country.
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South Africans can expect to see changes in financing of cars, petrol prices, as well as insurance costs.
What the junk status means for car financing
One can expect an increase in the risk premium, essentially meaning that lenders will increase interest rates, as a result of a perceived ‘greater risk’ in default.
Higher interest rates increases the cost of families paying for loans from banks – financing things like home loans and vehicle finance payments.
If interest rates go up‚ as S&P expects it to‚ the cost of borrowing goes up. It increases your credit card repayments and the amount you need to pay the bank every month, for your short-term loan, or car and home loan.
Pinheiro believes that the junk status will impose a ‘cascade effect’ in the entire financing industry; increasing the interest rates of new contracts and making it more expensive to acquire new vehicles.
“If, in your current financing contract, the interest rates are not fixed (e.g. adjusted according to the base interest rate of the government), you should think about selling your vehicle as soon as possible,” says Pinheiro.
What junk status means for car insurance
The downgrade by Standard and Poor’s, and Fitch Ratings, is expected to hit the short-term insurance industry in particular.
“The downgrade will increase the overall cost of foreign capital for South African entities, due to high interest rates and strong devalued currency. Therefore, financial institutions will have to transfer these costs to the market, by increasing the base interest rates. Junk status will impact the entire auto-trade industry, from spare part costs to insurance premium of most vehicles, especially the imported ones. If your current insurance contract is about to expire, you may see a substantial increase in the monthly premium,” says Pinheiro.
The cost of motor parts – of which the majority are imported – will increase leading to increased repair costs, followed by growing premiums for policyholders, according to the South African Insurance Association (SAIA) Chief Executive, Viviene Pearson.
She says that South African consumers and businesses should prepare themselves for an increase in their car insurance premiums.
“This could expose consumers to financial risks in the event of a loss or damage to assets. Furthermore‚ motor-body repairers’ building industry, and others‚ will feel the pinch of less work‚ leading to job losses,” said Pearson
What junk status means for petrol
A weaker rand means that petrol prices are likely to rise. If petrol prices go up‚ food prices will follow. The raw ingredient of petrol is oil‚ which is bought in dollars. When the rand weakens‚ oil prices will therefore rise and so will the price of petrol.
The knock-on effect of a weaker rand is higher transport costs. Higher transport costs affect the price of everything moved by trucks – from food to imported goods, and anything you buy at a shop.
Would this be the right time to sell your car?
“With the country being downgraded to junk status, owning a car is expected to become more expensive and depending on the impact of higher costs, more people may decide to sell their vehicles,” says Pinheiro.
If you choose to sell your car to CarZar, you will receive instant payment into your account. In just 30 minutes, your car will be sold. CarZar purchases financed vehicles and gives you cash for your car.
Tech startup, CarZar.co.za, founded in 2016, is an online car buying service for the second-hand auto-trade market, in South Africa. The fast-growing online startup is backed by Cape-based venture capital firm, as well as Silvertree Capital, whose consumer-focused Internet startups also include PriceCheck, Faithful to Nature and CyberCellar.