WIDELY contestable, the decision by rating agency S&P Global to downgrade South Africa’s sovereign rating to junk status came as a result of “self-inflicted pain” and bad leadership from President Jacob Zuma but as it may, the damage has been done and the trickle-down effects promise a regional onslaught.
As the region, inclusive of a highly South Africa dependent Namibia, was beginning to cope with the threat of pantomime villain of a reported captured treasury down south, it goes without saying that the effects of a sovereign credit rating downgrade would be significant for Namibia which is in the midst of its fiscal consolidation drive.
Whilst the 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, it is also almost certain that the effects of President Zuma’s night of long knives will drive up Namibia’s debt stock and likely causes us to be downgraded too.
If this happens, it would drive up borrowing costs, which in turn would have a negative impact on the government’s finances. It could also lead to foreigners leaving Namibia’s capital markets as well as driving the Namibian dollar weaker. And it would in-turn push interest rates up, which would hurt ordinary Namibians.
For most of the regions communities that are dependent on the South Africa, Zuma’s actions could be even more damning. What is real in today’s discourse is that this downgrade for South Africa would drive up debt servicing costs. In addition, the fiscus would be under pressure due to higher interest costs on debt repayments coupled with lower economic growth. The South African Government’s response would then be to raise taxes which significantly hurts Namibia which imports up to 75 percent of its retail goods and services.
With budget deficit for the past 20 years averaging -3.24 percent, a rating downgrade of this nature will force the Zuma government to either embark on injecting new money into the economy or borrowing more. Injecting new money into the economy would fuel inflation and exert pressure on the exchange rate. The central bank would then have to respond by raising interest rates, again hitting its regional consumers chiefly Namibia.
The implications of Zuma’s actions remain not only limited to Namibia and the region. Of the 472 companies listed on the Johannesburg Securities Exchange, 39 are dual listed. These have primary or secondary listings in South Africa, London and New York. Companies listed abroad will be less vulnerable because most of their earnings are from abroad and in foreign currencies. But companies listed solely in South Africa would be affected by the country’s poor economic performance and a weaker currency and their valuations would be negatively affected by the higher cost of capital.
Conclusively and since it takes an average of seven years for a country to regain its investment grade, South Africa looks to be stuck in a middle-income trap until at least 2024. Under this scenario it would be unable to move out of low-level manufacturing, unemployment levels would remain high and the economy would remain stagnant, a situation that could plunge the SACU revenue pool into a crisis; one Namibia does not want to dream about.
Confidente. Lifting the Lid. Copyright © 2015