Deputy Speaker, I was quite pleased that you upgraded me to Minister! [Laughter.]
The rating downgrades impact the fiscus and the economy by raising investors' perceptions of risk, and reducing the number of investors and their appetite to invest in the country.
This results in a higher cost of borrowing, not only for the fiscus, but also for the private sector and state-owned corporates, which face a higher cost of debt or equity issuance as a result of heightened perceptions of country risk. The downgrades might also result in a weaker exchange rate, which could raise the cost of key imports, such as petrol, and raise the overall inflation rate. Secondary effects on the economy might also include lower confidence levels that could result in slower domestic activity.
National Treasury has been monitoring the impact of the downgrades carefully, but has find it quite difficult to determine the precise impact, given the interplay of a number of factors. High levels of global liquidity, low returns in developed countries, and rising allocations to South Africa by portfolio managers due to our inclusion in the World Global Bond Index have also had an important dampening effect on the potential risk aversion associated with the downgrades in ratings.
At the same time, a number of domestic constraints to investment, including wildcat strikes and electricity constraints, may have affected the performance of financial market indicators, such as the rand and equity markets. Thank you, Deputy Speaker.