JOHANNESBURG - On Thursday, Fitch Ratings agency downgraded South Africa&39;s long-term debt to junk status. On Friday, Standard & Poor&39;s followed suit, while Moody&39;s placed the country on review for a downgrade.

If Moody&39;s in the next few months decides to downgrade South Africa to junk status, the impact on the fiscus will be severe.

But what is the impact on the economy -- and South Africans -- if all three ratings agencies downgrade the country to junk status?

Cost of borrowing increases

People without a regular income find that they cannot borrow money from banks. They are forced to borrow from loan companies or loan sharks, who charge much higher interest rates.

The loan companies realise that the increased number of default loans they make will be offset by their increased profits from charging high interest rates.

International bankers work on a similar principle. A country that is in junk status is seen as risky. Added risk comes at an added cost.

South Africa continually has to borrow money abroad to pay for large infrastructure projects or to service previous debt.

If South Africa&39;s ability to repay loans is seen as risky, the cost of borrowing will increase, resulting in a greater cost of debt to the Treasury.

And every additional rand that the Treasury pays in interest payments is a rand that cannot be used for social services.

International funds take money out of SA

Many international bond funds are forced by their own rules of conduct to divest from countries that enter junk status. This is in order to protect their shareholders from excessive risk.

This will result in a significant amount of capital leaving the country, exacerbating the difficulties it is already facing.

READ: Can SA escape another credit downgrade on Friday?

Being a nett importer of goods (we spend more on imports than we receive from goods we export), South Africa needs liquidity in order to be able to finance its purchases.

As this liquidity dries up, it is forced to borrow more money to finance its purchases, once again at a higher cost of borrowing.

The rand weakens, goods cost more

Under junk status, the rand comes under additional pressure. Many factors start working together to undermine the currency.

Businesses, both retailers and manufacturers, find the cost of sourcing goods higher. This forces them to raise prices and potentially cut staffing or limit salary increases in order to pay for the more expensive goods.

All of these measures result in less disposable money being available in society as fewer people are working, and those with jobs earn less.

The knock-on effect is that people buy less, putting further pressure on businesses and resulting in more companies being forced to close.

As the rand suffers so the petrol price increases as it takes more money to purchase a barrel of petrol.

Taxes increase

As the Treasury finds itself squeezed, it is forced to take measures to increase the amount of money available to service its debts. If fewer people are employed, it receives less taxes.

The Treasury could find itself forced to increase tax rates in order to draw more money into the fiscus. This once again leaves the consumer poorer, resulting in fewer goods being purchased.

Tax increases also lead highly skilled professionals, who typically earn the most and are most affected by these increases, to question whether they would do better financially abroad.

If a significant number of professionals leave the country, this has a further impact on the economy as the loss of skills results in greater inefficiency in industries where less-qualified people take over their jobs, there are lower profit margins, and once again a threat to jobs.

Social grants under pressure

The Treasury has to repay its debt. If it defaults on debt, the ability to borrow is totally undermined and the country faces the threat of collapse.

If the Treasury is not receiving enough money to service its now much more expensive debt repayments, it may be forced to cut social grants in order to free up money to pay its debts.

This would have a huge impact on the poorest of the poor and result in increased poverty and many more people going hungry. Medical and other facilities catering to the poor would also find their budgets cut, and, as always, the poor would be the ones to suffer the greatest hardship.