THE unfolding mess in neighbouring South Africa, which has seen President Jacob Zuma bash the economy to sub-investment grading status, through his recent midnight Cabinet reshuffle, which saw the removal of the country’s finance minister and his deputy, has grave implications for South African Development Community (SADC)nations.
We have long understood that South Africa is not the only country that will take a further beating, if its credit rating slips further into junk, and Zuma’s ongoing shenanigans, which include allegations of State capture by an Indian family, could very well make this happen, sooner rather than later.
SADC comprises 15 nations, including the Southern African Customs Union (SACU) countries, South Africa, Botswana, Namibia, Lesotho and Swaziland, which are all facing tough times because of Zuma’s actions.
SACU allows an unrestricted flow of goods and services between these countries, while customs and excise revenue is shared, based on a formula
This income forms a large part of the government revenues of Botswana, Lesotho, Namibia and Swaziland, and the funds are dispensed through the South African National Revenue Fund.
A further downgrading of South Africa’s credit rating will affect the country’s economic growth and inflation negatively, and those of its neighbours.
Lower investment and higher debt costs for South Africa, as a result of further downgrades, will weigh on its economic growth, which in turn have a massive impact on the economic growth rates of its neighbours, and their national budgets.
For example, in 2016/17, the SACU income, as a percentage of fiscal revenue, amounted to 26 percent for Namibia, 20 percent for Botswana, 32 percent for Lesotho and 38 percent for Swaziland, South Africa’s Mail and Guardian newspaper reported recently.
Credit rating downgrades jeopardise South Africa’s expected modest growth recovery, and hence the expected recovery in revenues.
In the February budget, delivered by now fired South African Finance Minister, Pravin Gordhan, it was estimated that SACU payments for the 2017/18 financial year would be in the region of R56 billion, rising to R62.4 billion in 2018/19 and R64.5 billion in 2019/20.
A further downgrade for South Africa will, however, be catastrophic.
Lesotho’s loti, Namibia’s dollar and Swaziland’s lilangeni are pegged one to one with the South African rand, and Botswana’s pula is pegged at 45 percent to it. The majority of the neighbouring nations’ imports are from South Africa, so increasing costs in that country would also fuel higher inflation.
Namibia stands to be the biggest loser in this equation.
The country currently has investment-grade credit ratings from both Fitch and Moody’s, but these ratings had already came under pressure, before South Africa’s downgrade, and both agencies had revised their outlook from stable to negative.
If South Africa continues to suffer further downgrades, it is inevitable that Namibia, owing to its linkages with the South African economy and financial markets, will also lose its investment-grade credit rating. Coupled with this is that Namibia may not to be as resilient to a downgrade to junk status as South Africa, because its economy is comparatively less diversified and its financial markets and revenue collection are not as well-developed. With this in mind, there is a case to be made for SADC to put pressure on Zuma to resign, especially after the ANC elective congress in December 2017. Whether he manages to install his ex-wife and ANC president, at the expense of Cyril Ramaphosa is immaterial. The region simply cannot afford a Zuma presidency any longer.
Confidente. Lifting the Lid. Copyright © 2015