How does junk status impact the PSL?

How does junk status impact the PSL?

So Standard & Poor’s and Fitch have downgraded South Africa’s credit rating to junk status; while Moody’s have announced that they have placed country’s credit rating on review for a downgrade.  This has been the subject of some discussion over the past few days.  But the question I have pondered in the same time has been – how does the downgrade to junk status really affect South African football?

To really answer this question with any kind of credible argument. We first have to unpack what the downgrading actually means for the man in the street.

Basically, this is similar to the credit rating you have with a credit bureau. If, as an individual, your credit record is bad, it becomes more difficult to get a loan and, when that credit is issued, you will have to pay a higher interest rate. In the same way, when government tries to borrow, less money will be available and the amount of interest charged will be higher. This means that the amount of money going to meet debt repayments will increase, leaving less money to spend on priorities as determined by the fiscal needs of the country.

What does this downgrade mean for the rand?

The rand dropped to R13‚70 – its lowest level since January 16‚ just after the announcement. It bounced back a few hours later. However, analysts say the rand will continue to weaken.  Quite a few of local and foreign investment funds that invest pensions or savings into debt are not allowed to do so in places that have junk status. Reuters reported that as much as $10 billion dollars could leave the country, and so as more people sell rands to buy other currencies‚ the value of the rand drops.

Now the raw ingredient of petrol is oil‚ which is bought in dollars. As we have come to learn over the last few years, a weaker rand has a negative impact on the price of petrol which affects transportation costs; therefore this means a higher inflation rate. To fight inflation, the Reserve Bank might just increase the interest rates, hitting the consumer hard on all debts they’ve incurred; from home loans, to cars and credit card, as monthly installments go up.

So the first thing we can expect to happen to the PSL is a further reduction in stadium attendance numbers.  I say further reduction, because we have already seen progressive diminishing numbers at the stadium in the past few years. Now some pundits would rather have you believe that the quality of the PSL is getting worse, and that’s because they have an affinity for self-deprecation. But in reality when there is a reduction in disposable income in all households, it stands to reason that people will change their priorities even more. Therefore even if the league makes the conscious decision to hold off on price increases on tickets next season. An increase in the cost of transport and refreshment meals at the stadium will make the attending the stadium cost prohibitive.

So in six months’ time when there is a reduction in gate takings at the stadium, and pundits wants to convince you that it is because of the poor quality of football. Just remember this.

You will be watching the same league, with the same players and the same coaches that produced three continental cup finalists, one continental champion and one super cup winner in recent years. It will the same players and coaches who produced three record breaking tittle campaigns on points back to back. The same league that now has four clubs in with a realistic chance to win the league, well into the fourth quarter of the season. When they say the quality in the league is poor, just remember that while the players, the clubs and coaches remained the same, there is only one common denominator in the equation which has progressively gotten worse. And that’s the economy.

The second thing that will impact the PSL is a reduction in all capital expenditure projects going forward. In other words as the cost of capital increases with the increase in interest rates, we can duly expect to see a reduction or a slowing down of investments in such things as development academies because such structures require an investment in fixed assets which require medium or long term debt funding. The cost of which will become progressively difficult to justify by way of a plausible risk and return parity.

The third thing that will be impacted in the PSL is the league’s attractiveness to foreign investment. In my up-coming book South African football, from the eye of the beholder. I dedicate a whole chapter to a discussion about the changes we can expect to occur in the ownership of clubs over the next twenty years owing to financial fair play rules implemented in the Europe over the last few years. In fact we have seen the Atlantico Madrid – Chippa United transaction take shape earlier this season which I think is the first of many such deals to come all over the world (please see link below for an blog I did earlier on the impact of these arrangements on the South African football industry).

CLICK HERE:  Deafening silence over Chippa – Atletico deal?

So the question begs knowing that a junk status rating effectively says to an investor – do not invest your money in that country because you might not reap any returns. The question begs, does the downgrade means that clubs in the PSL present far less attractive investment going forward? Or conversely does the drop in currency mean that the European clubs can now buy PSL clubs at a fraction of what they would have had to pay three weeks ago?

I am not sure.

What I do know is, either way the junk status will affect the investment decision on this matter. Because even if the clubs might prefer to over-look the junk status rating, because of the infrastructural benefits offered by South Africa as a host country. The net present values (NPV) and internal rate of return (IRR) calculations will still be done using a higher inflation and interest rate outlook than before. And therefore the return on investment demands or expected returns on their South African entity will be higher than it would have been three weeks ago.

Whatever the impact, a PSL club will become harder to run as a viable entity over the next few year. But I have always argued that we have better business people running clubs in our league than in many of the UEFA leagues. Let’s be honest, we have gone through many dips in our economy including a recession. How many clubs did we lose? Moroka Swallows. Think about that.

Just saying

The tempest prognosticator

Themba A Dikgale

By |2017-04-12T13:38:25+00:00April 12th, 2017|Opinions|Comments Off on How does junk status impact the PSL?