By Hilary Mare
THE controversial decision by South Africa’s President Jacob Zuma to reshuffle his Cabinet, subsequently leading to Standard and Poor’s placing South Africa’s credit outlook at junk status may influence the outcome of credit rating due this year and carry a negative trickle-down effect on Namibia.
The agency has downgraded the South Africa to B-B plus – otherwise known as junk status – from Triple B minus.
“Exposure of Namibia’s economy to external factors is demonstrated by the impact of South Africa’s downgrade on public debt, up by N$1.6 billion in four days,” Finance Minister Calle Schlettwein noted.
This downgrade comes in the wake of Fitch Rating agency last Friday affirming that President Zuma’s Cabinet reshuffle signals a change in policy direction and it could result in a review of sovereign ratings.
“This downgrade drives up Namibia’s debt stock and likely causes us to be downgraded too,” commented local economist Rowland Brown.
A sovereign credit rating downgrade to junk status means South Africa will pay more towards interest on debt.
Borrowing costs will therefore increase which means there will be less funds for infrastructure spending, says Christie Viljoen, economist at KPMG.
“In addition, the rand is expected to fall sharply, which in turn will increase imports, which will negatively impact inflation.”
On the economic front a downgrade to sub-investment grade will mean business and consumer confidence will decline, resulting in lower investments and spending.
“This will make the average South African just more cynical,” Viljoen added.
He cautioned however that it it’s too soon to start talking about a recession. “We can expect much slower economic growth than previously predicted.”
Fitch which will also review South Africa’s and Namibia’s credit rating this year noted that change in policy will raise political tensions within the ANC and its traditional allies, potentially weakening public finances and standards of governance.
“We believe fiscal consolidation is likely to become less of a priority and the move to improve transparency and governance of state-owned enterprises (SOEs) will be halted,” said Fitch.
Last year the outlook for Namibia’s rating was revised by Fitch, from ‘stable’ to ‘negative’.
Imperatively, the rand fell by as much 2 percent to the dollar in response to the news of the downgrade, while government bonds also weakened sharply.
South African Treasury said it is committed to a responsible fiscal path following S&P’s decision.
“South Africa is committed to a predictable and consistent policy framework, which responds to changing circumstances in a measured and transparent fashion,” the Treasury said in statement.
The rand at R13.44 to the dollar at the opening of the JSE yesterday, was falling to R13.69 by the afternoon before clawing back some of the losses during the day.
By 5.30pm, the rand was bid at R13.72.
Banking stocks also continued to tank yesterday, with Nedbank down 1.9 percent to R236.80, followed by FirstRand at 1.32 percent lower to R45.75 and Standard Bank slumping 0.17 percent to R143.50.
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